Praxair’s remarkably upbeat outlook for net income has analysts expecting substantial growth of 51.15% in the coming 12 months, but let’s stop and reflect on this expectation. Investors should consider the forces that are spurring this growth, as there are certain implications that can impact on shareholder return. To get some insight, I will shine a light on the behaviour of Praxair’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 Praxair
Understanding PX’s earnings with profit margin
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 PX’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 PX
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = 1.25 Billion ÷ 11.44 Billion = 10.90%
There has been a contraction in Praxair’s margin over the past five years, due to net income declining at -1.43% on average, which was more than the average fall in revenue of -0.64%, which suggests that the falling revenue has also resulted in a decline in the net income that is converted from from the top line. The current 10.90% margin seems to continue this movement, indicating that the earnings decline has likely been driven through an increase in cost alongside the the decline in revenue.
What can we tell from future expectations?
It is expected that margins will shift towards expansion, with an expectation of 5.57% in annual revenue growth and a forecasted 15.93% 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 interested in the company should remember that margin expansion 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 PX, profit margins moving forward are forecasted to expand simultaneously with Chemicals industry margins, whilst at the same time, PX’s forecasted ROE of 29.69% exceeds that of the expected 13.48% ROE of the industry (note that this observation is also influenced by relative debt levels). This serves as an indication of the confidence amongst analysts covering that stock that the nature of Praxair’s earnings will result in a higher return per dollar of equity compared to the industry. 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 Praxair’s future earnings whilst maintaining a watchful eye over the sustainability of their cost management methods and the runway for top line growth.
For PX, there are three relevant aspects you should further research:
- 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.
- Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for PX’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of PX? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!