Tilt Renewables Limited (NZE:TLT): What is driving earnings?

As analysts forecast Tilt Renewables Limited (NZSE:TLT) to produce net income growth in the triple digits in the coming 12 months, it's necessary to take a moment and think through this confident outlook. It is crucial for investors to do this, so they can judge the underlying components responsible for spurring this projected increase, as the return realised by shareholders may look different in the future if underlying assumptions are not realised. To get a preliminary understanding, I will shine a light on the behaviour of Tilt Renewables’s margins to help recognise the underlying make-up of revenue and expenses that is responsible for driving future earnings expectations and what it means for TLT's returns relative to its competitors.

What can we tell from TLT's profit margin?

Attractive margins generally indicate a desirable ability to translate sales revenue in to earnings, and return for shareholders. Knowing the portion of top line revenue that is turned into net income helps to assess this ability whilst spotting profit drivers, and can be found by calculating TLT's profit margin.

There has been a contraction in Tilt Renewables's margin over the past five years, with 0.70% in average revenue growth and a dramatic earnings decline, indicating that that a smaller percentage of revenue is being converted in to net income despite the top line growth. The current 2.05% margin seems to continue this movement, indicating the earnings decline has been driven through an increase in costs as opposed to a reduction in revenue.

What can we tell from future expectations?

Margins are expected to shift towards expansion, with 6.51% in expected annual revenue growth and 29.44% earnings growth expected annually. This suggests the previous earnings decline is expected to reverse due to enhanced cost efficiency alongside revenue increases. But as a result of improved cost efficiency, net income growth is expected to exceed revenue growth, which is causing the expectation for margins to expand. However, investors should realise a expanding margin can mean different things for different companies, thus more detailed research is essential.

In many situations, looking at a company's profit margin in relation to other similar businesses can be more informative. For TLT, profit margins moving forward are forecasted to expand simultaneously with margins in the Renewable Energy industry, and at the same time, the industry’s forecasted ROE of 5.82% exceeds that of the expected 1.83% ROE for TLT. This suggests that analysts expect Tilt Renewables's return per dollar of equity will lag behind the industry as a result of the earnings attributes identified by our margin analysis. But before moving forward, it must be remembered that bottom line earnings and profit margins are susceptible to being manipulated and don't always give the full picture. Thus, it is essential to run your own analysis on Tilt Renewables's future earnings whilst maintaining a watchful eye over the sustainability of their cost management methods and the runway for top line growth.

Next Steps:

For TLT, I've put together three key aspects you should further examine:

1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

2. Valuation: What is TLT worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether TLT is currently mispriced by the market.

3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of TLT? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.