How Do Analysts See EDP - Energias de Portugal SA.'s (ELI:EDP) Margin Performing In The Future?

EDP - Energias de Portugal's negative outlook for net income has analysts projecting a meaningful decline of -29.10% in the coming 12 months, but it's necessary to take a moment and evaluate this projection. Those invested in the stock should contemplate the factors that are sparking this decrease, because the sustainability of returns to shareholders can be impacted on in different ways. To get some insight, this article will interpret EDP - Energias de Portugal's margin performance to assist in analysing the revenue and cost anatomy behind the earnings expectations for the future and the impact it has on shareholder returns relative to the wider industry.

View our latest analysis for EDP - Energias de Portugal

Breaking Down EDP'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 EDP's profit margin.

The past five years have seen EDP - Energias de Portugal's margin contract, as a result of net income declining at -1.39% on average, which was faster than the average fall in revenue of -0.49%, which suggests that the falling revenue has also resulted in a decline in the net income that is converted from from the top line. The current 7.07% margin seems to continue this movement, which suggests that the decrease in net income has likely occurred from a combination of a lack of cost efficiency as well as a fall in the top line.

Understanding what could be driving EDP - Energias de Portugal's future earnings

It is expected that margins will contract further, with a forecasted decline of -2.74% annually in revenue and net income forecasted to decline annually at -3.99%. This suggests the previous earnings stability is expected to transition in to a decline due to an expected fall in revenue and increase in costs. The combination of these two forces mean net income is forecasted to fall at a faster pace than revenue, which is causing the expectation for margins to contract. However, investors should realise margin contraction can hold various implications on the company's performance depending on how it operates, which makes further research very important.

Generally, it is useful to judge profit margin and its implication on return in comparison to other companies who share similar traits. For EDP, it is expected that profit margins will contract at the same time as the margins expand in the Electric Utilities industry, and at the same time, EDP - Energias de Portugal's projected ROE of 8.54% is relatively similar to the industry's 8.70% expectation, but debt levels need to be considered before accpeting this observation. This highlights that analysts believe the underlying earnings characteristics mentioned above will provide a return for shareholders that is comparable to the industry. However, margins use items on the income statement that are prone to being manipulated by various accounting measures, which can distort our analysis. Thus, it is essential to run your own analysis on EDP - Energias de Portugal's future earnings whilst maintaining a watchful eye over the projected fall in revenue and increase in costs, as a continuation of this trend can be dangerous for current shareholders, but a reversal may present an attractive investment opportunity.

Next Steps:

For EDP, there are three essential aspects you should further research:

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 EDP 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 EDP is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of EDP? 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.