What Is Driving Rockwell Automation Inc's (NYSE:ROK) Margins In The Next Few Years?

As analysts forecast Rockwell Automation Inc (NYSE:ROK) to record robust earnings growth of 38.64% annualised over the next few years, it's important to take a step back and evaluate this strong vision. Investors should consider the forces that are causing this growth, because the sustainability of returns to shareholders can be impacted on in different ways. To get some insight, I will try to evaluate Rockwell Automation'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.

See our latest analysis for Rockwell Automation

What does ROK'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. ROK's profit margin will help us understand the extent of this ability, as well as identify the forces behind earnings expectations.

The past five years have seen Rockwell Automation's margin contract, as a result of net income declining at -1.66% on average, which was more than the average fall in revenue of -0.079%, which suggests that the falling revenue has also resulted in a decline in the net income that is converted from from the top line. ROK's most recent margin of 6.33% appears to follow this trend, 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.

Using Rockwell Automation's margin expectations as a way to understand projections for the future

Based on future expectations, ROK's profit margin will move from contraction into expansion, with an expectation of 4.30% in annual revenue growth and a forecasted 38.64% in annual net income growth. This suggests the previous earnings stability is expected to transition in to stronger growth through 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. However, those watching the stock must know a expanding margin has different impacts on profit and return depending on the underlying situation, which reinforces the importance of deeper research. Profit margins are commonly useful when employed as a comparitive measure to judge a business' profit-making ability against its industry. For ROK, it is expected that profit margins will expand along with the Electrical industry margins, and at the same time, the forecasted ROE of Rockwell Automation is greater than the industry at 52.66% and 11.22% respectively, although it must not be forgotten than this result is influenced by the company's debt levels. This suggests that analysts expect Rockwell Automation'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 Rockwell Automation'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 ROK, I've compiled three relevant factors 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 ROK 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 ROK is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of ROK? 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.