As analysts expect Versum Materials Inc (NYSE:VSM) to report solid earnings growth of 24.02% annualised over the couple of years ahead, it’s important to take a step back and reflect on this positive outlook. 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 help investors get a top level understanding, I will try to evaluate Versum Materials’s margin behaviour 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 out our latest analysis for Versum Materials
What does VSM’s profit margin tell us?
At a high level, a company’s ability to earn on their sales efforts can play an important role in determining shareholder value. VSM’s profit margin will help us understand the extent of this ability, as well as identify the forces behind earnings expectations.
Margin Calculation for VSM
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = US$177.50m ÷ US$1.26b = 14.12%
The past five years have seen Versum Materials’s margin expand, due to 22.73% in average net income growth surpassing a 7.03% 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 14.12% margin seems to continue this movement, which could imply improved cost efficiency as well as increasing revenue contributed to the previous earnings growth.
Using Versum Materials’s margin expectations as a way to understand projections for the future
Based on future expectations, VSM’s profit margin will expand further, with an expectation of 5.91% in annual revenue growth and a forecasted 24.02% 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. Nonetheless, 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 VSM, I’ve put together three relevant factors 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.
- 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.
- 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!