As analysts project Versum Materials Inc (NYSE:VSM) to report noticeable earnings growth of 31.54% over the next year, it’s necessary to take a moment and think through this encouraging sentiment. It is crucial for investors to do this, so they can judge the underlying components responsible for driving this projected increase, as the return realised by shareholders may look different in the future if underlying assumptions are not realised. To help investors get a top level understanding, this article will interpret Versum Materials’s margin performance 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 Versum Materials
What can we tell from VSM’s profit margin?
Attractive margins generally indicate a desirable ability to translate sales revenue in to earnings, and return for shareholders. Knowing the portion of top line revenue that is turned into net income helps to assess this ability whilst spotting profit drivers, and can be found by calculating VSM’s profit margin.
Margin Calculation for VSM
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = 160.80 Million ÷ 1.19 Billion = 13.55%
Versum Materials’s margin has expanded in the past five years, with 26.12% in average net income growth outstripping a 6.05% average growth in revenue, which suggests that the company has been able to convert a larger percentage of revenue into net income whilst grow their top line at the same time. VSM’s most recent margin of 13.55% appears to follow this trend, which could imply improved cost efficiency as well as increasing revenue contributed to the previous earnings growth.
Understanding what could be driving Versum Materials’s future earnings
It is expected that margins will keep on expanding, with 4.57% in expected annual revenue growth and a forecasted 22.83% 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, investors should realise a expanding margin can mean different things for different companies, thus more detailed research is essential. Profit margins are commonly useful when employed as a comparitive measure to judge a business’ profit-making ability against its industry. For VSM, future profit margin is expected to expand simultaneously with margins in the Semiconductor industry, and at the same time, VSM’s forecasted ROE of 94.74% exceeds that of the expected 11.56% ROE of the industry (note that this observation is also influenced by relative debt levels). This suggests that analysts expect Versum Materials’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 Versum Materials’s future earnings whilst maintaining a watchful eye over the sustainability of their cost management methods and the runway for top line growth.
For VSM, there are three pertinent aspects you should look at:
- 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 VSM 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 VSM is currently mispriced by the market.
- 3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of VSM? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!