With analysts projecting Orbotech Ltd (NASDAQ:ORBK) to report robust earnings growth of 24.99% in the coming year, let’s stop and think through this strong vision. Those invested in the stock should contemplate the factors that are driving this growth, because the sustainability of returns to shareholders can be impacted on in different ways. To get a preliminary understanding, this article will interpret Orbotech’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.View our latest analysis for Orbotech
What can we tell from ORBK’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. 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 ORBK’s profit margin.
Margin Calculation for ORBK
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = 102.14 Million ÷ 859.02 Million = 11.89%
The past five years have seen Orbotech’s margin expand, due to 21.88% in average net income growth outstripping 10.21% in average revenue growth, indicating that that the previous revenue growth has been acompanied by a growing portion translated in to earnings. The current 11.89% margin seems to continue this movement, which suggests that the increase in net income has likely occurred from a combination of enhanced cost efficiency as well as top line growth.
What can we tell from future expectations?
It is expected that margins will keep on expanding, with 8.56% in expected annual revenue growth and annual net income growth forecasted at 20.15%. 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. In Orbotech’s case, it is expected that profit margins will expand along with the margins in the Electronic industry, and at the same time, the forecasted ROE of Orbotech is greater than the industry at 13.90% and 10.53% respectively, although it must not be forgotten than this result is influenced by the company’s debt levels. This highlights that analysts are confident that the underlying earnings characteristics mentioned above will provide a higher return for shareholders in relation to the industry. 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 Orbotech’s future earnings whilst maintaining a watchful eye over the sustainability of their cost management methods and the runway for top line growth.
For ORBK, there are three essential aspects 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 ORBK 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 ORBK is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of ORBK? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!