Stock Analysis

Rollins Inc (NYSE:ROL): Are Forecast Margins sustainable?

NYSE:ROL
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As analysts expect Rollins Inc (NYSE:ROL) to report robust earnings growth of 37.34% over the next year, it's necessary to take a moment and consider this strong vision. It is crucial for investors to do this, so they can judge the underlying components responsible for spurring this growth, as there are certain implications that can impact on shareholder return. To get a preliminary understanding, this article will interpret Rollins's margin performance to help recognise the underlying make-up of revenue and expenses that is responsible for driving future earnings expectations and what it means for ROL's returns relative to its competitors.

View our latest analysis for Rollins

Understanding ROL's earnings with 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. ROL's profit margin will help us understand the extent of this ability, as well as identify the forces behind earnings expectations.

Margin Calculation for ROL

Profit Margin = Net Income ÷ Revenue

∴ Profit Margin = 179.12 Million ÷ 1.67 Billion = 10.70%

The past five years have seen Rollins's margin expand, due to average net income growth of 10.16% exceeding a 5.35% average growth in revenue, indicating that that the previous revenue growth has been acompanied by a growing portion translated in to earnings. The current 10.70% margin seems to continue this movement, which could imply improved cost efficiency as well as increasing revenue contributed to the previous earnings growth.

How is Rollins’s margin expected to behave in the future and what could it mean for shareholders?

Forward looking projections suggest margins will expand further, with 6.20% in expected annual revenue growth and annual net income growth forecasted at 31.48%. 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 margin expansion can hold various implications on the company's performance depending on how it operates, which makes further research very important.

NYSE:ROL Future Profit Apr 13th 18
NYSE:ROL Future Profit Apr 13th 18
In many situations, looking at a company's profit margin in relation to other similar businesses can be more informative. In Rollins’s case, it is expected that profit margins will expand along with the margins in the Commercial Services industry, and at the same time, the forecasted ROE of Rollins is greater than the industry at 37.10% and 12.04% respectively. This suggests that analysts expect Rollins's return per dollar of equity will exceed the industry due to the earnings attributes identified in our margin analysis. 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 Rollins'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 ROL, there are three fundamental 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 ROL 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 ROL is currently mispriced by the market.
  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of ROL? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!

Valuation is complex, but we're helping make it simple.

Find out whether Rollins is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

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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.