With analysts expecting ASV Holdings Inc (NASDAQ:ASV) to register twice as much earnings in the coming year, it’s necessary to take a moment and reflect on 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 there are certain implications that can impact on shareholder return. To help investors get a top level understanding, I will try to evaluate ASV Holdings’s margin behaviour 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.
What does ASV’s profit margin tell us?
At a high level, a company’s ability to earn on their sales efforts can play an important role in determining shareholder value. ASV’s profit margin will help us understand the extent of this ability, as well as identify the forces behind earnings expectations.
Margin Calculation for ASV
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = 383.00 Killion ÷ 117.94 Million = 0.32%
There has been an expansion in ASV Holdings’s margin over the past five years, as a result of positive average net income growth of 23.13% and decline in revenue growth of -0.48% on average, which suggests that the company has been able to convert a larger percentage of revenue into net income despite the top line has fallen over the previous 5 years. The current 0.32% margin seems to continue this movement, which could imply that improved cost efficiency has driven earnings growth rather than growing top line revenue.
Understanding what could be driving ASV Holdings’s future earnings
It is expected that margins will further the previous expansion, with annual revenue growth tipped at 10.38% and annual net income growth forecasted at 51.95%. This suggests future earnings growth is driven further by enhanced cost efficiency alongside revenue increases, which is enlarging the incremental amount of net income that is retained from the forecasted revenue growth. Despite this, investors should realise a expanding margin can mean different things for different companies, thus more detailed research is essential. Generally, it is useful to judge profit margin and its implication on return in comparison to other companies who share similar traits. For ASV, profit margins moving forward are forecasted to expand simultaneously with Machinery industry margins, and at the same time, ASV’s projected ROE of 5.79% is less than the 11.66% expected ROE for the rest of industry. This highlights that analysts believe the underlying earnings characteristics mentioned above will provide a lower return for shareholders in relation 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 ASV Holdings’s future earnings whilst maintaining a watchful eye over the sustainability of their cost management methods and the runway for top line growth.
For ASV, I’ve put together three essential 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 ASV 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 ASV is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of ASV? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!