What Is Driving Adient plc's (NYSE:ADNT) Margins In The Years Ahead?

Adient's steady outlook for net income has analysts expecting slight growth of 4.39% over the next year, but let's stop and consider this expectation. It is crucial for investors to do this, so they can judge the underlying components responsible for causing this growth, as there are certain implications that can impact on shareholder return. To get some insight, I will try to evaluate Adient's margin behaviour so investors can evaluate the revenue and cost drivers behind future earnings projections and understand how they may impact on returns compared to the industry.

What can we tell from ADNT's profit margin?

At a high level, a company’s ability to earn on their sales efforts can play an important role in determining shareholder value. By calculating ADNT's profit margin, we can take a closer look at this ability and use it to understand what is driving earnings growth.

The past five years have seen Adient's margin contract, with net income declining at -29.14% on average, which was quicker than the average fall in revenue of -8.31%, meaning that the decrease in revenue has coincided with a smaller portion falling to the bottom line. ADNT's most recent margin of 5.41% appears to follow this trend, indicating that the earnings decline has likely been driven through an increase in cost alongside the the decline in revenue.

What can we tell from future expectations?

Based on future expectations, ADNT's profit margin will shift towards expansion, with an expectation of 2.78% in annual revenue growth and 7.13% 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. Despite this, investors should realise a expanding margin can hold various implications on the company's performance depending on how it operates, which makes further research very important.

Profit margins are commonly useful when employed as a comparitive measure to judge a business' profit-making ability against its industry. For ADNT, it is expected that profit margins will expand simultaneously with Auto Components industry margins, and at the same time, ADNT’s forecasted ROE of 19.87% exceeds that of the expected 17.75% ROE of the industry (note that this observation is also influenced by relative debt levels). This highlights that analysts are confident that the underlying earnings characteristics mentioned above will provide a higher return for shareholders in relation to the industry. 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 Adient'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 ADNT, there are three pertinent aspects you should look at:

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 ADNT 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 ADNT is currently mispriced by the market.

3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of ADNT? 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.