Praxair Inc’s (NYSE:PX) remarkably upbeat outlook for net income drives analysts to forecast material growth of 52.91% over the next year, but let’s stop and think through this expectation. It is crucial for investors to do this, so they can judge the underlying components responsible for driving this growth, as the return realised by shareholders may look different in the future if underlying assumptions are not realised. To get a preliminary understanding, I will shine a light on the behaviour of Praxair’s margins to help recognise the underlying make-up of revenue and expenses that is responsible for driving future earnings expectations and what it means for PX’s returns relative to its competitors.See our latest analysis for Praxair
Breaking Down PX’s 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. PX’s profit margin will help us understand the extent of this ability, as well as identify the forces behind earnings expectations.
Margin Calculation for PX
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = US$1.32b ÷ US$11.71b = 11.27%
Praxair’s margin has contracted in the past five years, with net income declining at -1.81% on average, which was more than the average fall in revenue of -0.47%, meaning that the decrease in revenue has coincided with a smaller portion falling to the bottom line. PX’s most recent margin of 11.27% appears to follow this trend, which could imply difficulty in managing costs as well as falling revenues contributed to the previous earnings decline.
What does Praxair’s margin expectation tell us about future earnings?
Margins are expected to reverse its previous trend and start to expand, with annual revenue growth tipped at 5.60% and a forecasted 14.74% 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. Despite this, investors should realise margin expansion can hold various implications on the company’s performance depending on how it operates, which makes further research very important.
For PX, I’ve compiled three relevant aspects you should look at:
- 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.
- Future Earnings: How does PX’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
- 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!