What Do Analysts Think About Salesforcecom inc's (NYSE:CRM) Profit Margin?

With analysts forecasting Salesforcecom inc (NYSE:CRM) to produce net income growth in the triple digits over the next year, let's stop and think through this promising sentiment. It is crucial for investors to do this, so they can judge the underlying components responsible for causing this projected increase, because the sustainability of returns to shareholders can be impacted on in different ways. To get a preliminary understanding, I will try to evaluate Salesforce.com's margin behaviour 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.

Breaking Down CRM's Profit Margin

Attractive margins generally indicate a desirable ability to translate sales revenue in to earnings, and return for shareholders. CRM's profit margin will help us understand the extent of this ability, as well as identify the forces behind earnings expectations.

There has been a contraction in Salesforce.com's margin over the past five years, as a result of 24.35% in average revenue growth surpassing 12.03% in average net income growth, which suggests that a smaller percentage of revenue falls to the bottom line despite the fact revenue has increased over the previous 5 years. The current 0.09% margin seems to continue this movement, indicating that earnings growth has likely been driven through an increase in revenue rather than improved cost management.

Understanding what could be driving Salesforce.com's future earnings

Margins are expected to transition into expansion, with an expectation of 17.38% in annual revenue growth and annual net income growth forecasted at 50.84%. 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. However, investors should realise a expanding margin can mean different things for different companies, thus more detailed research is essential.

In many situations, looking at a company's profit margin in relation to other similar businesses can be more informative. In Salesforce.com’s case, future profit margin is expected to expand along with the Software industry margins, whilst at the same time, CRM’s forecasted ROE and the expected ROE of the industry is roughly equal at 12.69% and 12.98% respectively, (note that relative debt levels need to be considered in this observation). This suggests that analysts expect Salesforce.com's return per dollar of equity will approximately match the industry as a result of the earnings attributes identified by 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 Salesforce.com's future earnings whilst maintaining a watchful eye over the sustainability of their cost management methods and the runway for top line growth.

Next Steps:

For CRM, I've compiled three relevant 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 CRM 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 CRM is currently mispriced by the market.

3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of CRM? 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.