China Yuchai International’s steady outlook for net income drives analysts to expect subtle growth of 0.75% in the coming year, but it’s necessary to take a moment and consider this appraisal. Investors should consider the forces that are spurring this projected increase, because the sustainability of returns to shareholders can be impacted on in different ways. To get a preliminary understanding, I will shine a light on the behaviour of China Yuchai International’s margins 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 CYD’s profit margin tell us?
In general, the value that accrues to equity holders is partly reliant on the ability of a company to convert sales revenue in to earnings. By calculating CYD’s profit margin, we can take a closer look at this ability and use it to understand what is driving earnings growth.
Margin Calculation for CYD
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = 772.10 Million ÷ 16.18 Billion = 4.77%
The past five years have seen China Yuchai International’s margin contract, as a result of net income declining at -9.10% on average, which was more than the average fall in revenue of -0.56%, indicating that that the company’s decline in the top line has also corresponded with a smaller portion flowing out as earnings. CYD’s most recent margin of 4.77% 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 does China Yuchai International’s margin expectation tell us about future earnings?
It is expected that margins will lose its previous trend and become quite steady, with 3.96% in expected annual revenue growth and 3.89% earnings growth expected annually. This suggests the previous earnings decline is expected to reverse due to the forecasted increase revenue alongside sound cost management. But the contribution from both of these benefits mean the growth in net income and revenue are expected to occur at a relatively similar pace, which is causing the expectation for margins to remain steady. Nonetheless, investors should realise margin stagnation can mean different things for different companies, thus more detailed research is essential. Profit margins are commonly useful when employed as a comparitive measure to judge a business’ profit-making ability against its industry. For CYD, it is expected that profit margins will remain stable at the same time as the Machinery industry margins expand, and at the same time, the industry’s forecasted ROE of 11.66% exceeds that of the expected 9.39% ROE for CYD. This suggests that analysts expect China Yuchai International’s return per dollar of equity will lag behind the industry as a result of the earnings attributes identified by our margin analysis. 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 China Yuchai International’s future earnings whilst keeping a watchful eye over their ability to maintain cost efficiency and top line growth as these are the factors driving future earnings growth according to our preliminary margin analysis.
For CYD, there are three pertinent factors 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 CYD 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 CYD is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of CYD? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!