With analysts forecasting RH (NYSE:RH) to produce twice as much earnings in the coming 12 months, let’s stop and consider this confident outlook. Those invested in the stock should contemplate the factors that are causing this projected increase, because the sustainability of returns to shareholders can be impacted on in different ways. To help investors get a top level understanding, this article will interpret RH’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 RH’s returns relative to its competitors.See our latest analysis for RH
A closer look at RH’s profit margin
Attractive margins generally indicate a desirable ability to translate sales revenue in to earnings, and return for shareholders. By calculating RH’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 RH
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = 11.36 Million ÷ 2.36 Billion = 0.48%
There has been an expansion in RH’s margin over the past five years, due to average net income growth of 18.24% exceeding a 15.83% average growth in revenue, which means that the previous increase in revenue has coincided with a larger portion falling to the bottom line. The current 0.48% margin seems to continue this movement, which could imply improved cost efficiency as well as increasing revenue contributed to the previous earnings growth.
Understanding what could be driving RH’s future earnings
Based on future expectations, RH’s profit margin will expand further, with an expectation of 5.95% in annual revenue growth and a forecasted 50.60% in annual net income growth. 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. Despite this, 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. Profit margins are commonly useful when employed as a comparitive measure to judge a business’ profit-making ability against its industry. In RH’s case, profit margins moving forward are forecasted to expand simultaneously with margins in the Specialty Retail industry, whilst at the same time, the forecasted ROE of RH is greater than the industry at 80.93% and 11.95% respectively. This suggests that analysts expect RH’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 RH’s future earnings whilst maintaining a watchful eye over the sustainability of their cost management methods and the runway for top line growth.
For RH, 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 RH 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 RH is currently mispriced by the market.
- 3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of RH? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!