Citrix Systems Inc (NASDAQ:CTXS): What Is Driving Earnings Margins?

With analysts expecting Citrix Systems Inc (NASDAQ:CTXS) to register a fall in earnings of -15.51% in the coming year, it's important to take a step back and consider this pessimistic vision. It is crucial for investors to do this, so they can judge the underlying components responsible for causing this decrease, 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 Citrix Systems's margin performance so investors can evaluate the revenue and cost drivers behind future earnings projections and understand how they may impact on returns compared to the industry.

Check out our latest analysis for Citrix Systems

A closer look at CTXS's 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. CTXS's profit margin will help us understand the extent of this ability, as well as identify the forces behind earnings expectations.

Citrix Systems's margin has contracted in the past five years, as a result of average revenue growth of 7.57% surpassing a 6.23% average growth in net income, which means that although revenue has increased, a smaller portion falls in to the bottom line. CTXS's most recent margin of 15.90% appears to follow this trend, indicating that earnings growth has likely been driven through an increase in revenue rather than improved cost management.

How is Citrix Systems’s margin expected to behave in the future and what could it mean for shareholders?

Margins are expected to become relatively steady, with 3.08% in expected annual revenue growth and a forecasted 2.85% in annual net income growth. This suggests future earnings growth is driven further by sound cost management alongside revenue increases, which is maintaining the incremental amount of net income that is retained from the forecasted revenue growth. Despite this, those watching the stock must know a stagnating margin can mean different things for different companies, thus more detailed research is essential.

Generally, it is useful to judge profit margin and its implication on return in comparison to other companies who share similar traits. For CTXS, future profit margin is expected to remain stable as the margins in the Software industry expand, whilst at the same time, CTXS’s forecasted ROE of 35.21% exceeds that of the expected 13.01% ROE of the industry (note that this observation is also influenced by relative debt levels). This suggests that analysts expect Citrix Systems'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 Citrix Systems's future earnings whilst keeping a watchful eye over their ability to maintain cost efficiency and top line growth as these are the factors driving future earnings growth according to our preliminary margin analysis.

Next Steps:

For CTXS, I've compiled three pertinent aspects you should further research:

• 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 CTXS 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 CTXS is currently mispriced by the market.
• 3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of CTXS? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.