General Dynamics Corporation (NYSE:GD): What Can We Expect From Future Profit Margins?

As analysts project General Dynamics Corporation (NYSE:GD) to record robust earnings growth of 14.64% in the coming year, it's important to take a step back and evaluate this positive outlook. 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 some insight, I will shine a light on the behaviour of General Dynamics’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.

View our latest analysis for General Dynamics

Understanding GD's earnings with profit margin

Attractive margins generally indicate a desirable ability to translate sales revenue in to earnings, and return for shareholders. By calculating GD'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 General Dynamics's margin expand, with a positive 8.97% average growth in net income and decline in revenue growth of -0.64% 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 9.40% 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 General Dynamics's future earnings

Forward looking projections suggest margins will expand further, with 6.52% in expected annual revenue growth and annual net income growth forecasted at 8.10%. 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. However, those watching the stock must know 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 General Dynamics in particular, profit margins moving forward are forecasted to expand along with the margins in the Aerospace & Defense industry, whilst at the same time, the forecasted ROE of General Dynamics is greater than the industry at 32.11% and 11.94% respectively, although it must not be forgotten than this result is influenced by the company's debt levels. This suggests that analysts expect General Dynamics's return per dollar of equity will exceed the industry due to the earnings attributes identified in 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 General Dynamics'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 GD, I've compiled three fundamental 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 GD 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 GD is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of GD? 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.