Ormat Technologies’s gloomy vision for earnings in the future has analysts forecasting a substantial decline of -30.91% over the next year, but let’s stop and consider this projection. It is crucial for investors to do this, so they can judge the underlying components responsible for causing this decrease, because the sustainability of returns to shareholders can be impacted on in different ways. To help investors get a top level understanding, this article will interpret Ormat Technologies’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 Ormat Technologies
Understanding ORA’s earnings with 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. By calculating ORA’s profit margin, we can take a closer look at this ability and use it to understand what is driving earnings growth.
Margin Calculation for ORA
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = 164.86 Million ÷ 686.94 Million = 24.00%
The past five years have seen Ormat Technologies’s margin expand, due to a 39.40% average growth in net income outstripping average revenue growth of 7.70%, which means that the previous increase in revenue has coincided with a larger portion falling to the bottom line. The current 24.00% margin seems to continue this movement, which could imply improved cost efficiency as well as increasing revenue contributed to the previous earnings growth.
What does Ormat Technologies’s margin expectation tell us about future earnings?
Margins are expected to shift towards contraction, with 5.90% in expected annual revenue growth and 2.64% earnings growth expected annually. This suggests future earnings growth is driven further by an increase in top line revenue, which is expected to squeeze the incremental amount of net income that is retained. Nonetheless, those interested in the company should remember that margin contraction can hold various implications on the company’s performance depending on how it operates, which makes further research very important. Profit margins are commonly useful when employed as a comparitive measure to judge a business’ profit-making ability against its industry. In Ormat Technologies’s case, future profit margin is expected to contract whilst the margins expand in the Renewable Energy industry, whilst at the same time, ORA’s forecasted ROE of 9.56% exceeds that of the expected 6.32% ROE of the industry (note that this observation is also influenced by relative debt levels). This suggests that analysts expect Ormat Technologies’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 Ormat Technologies’s future expectations whilst maintaining a watchful eye over the likelihood and sustainability of the top line performance that is expected to drive earnings growth.
For ORA, there are three relevant aspects you should further research:
- 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 ORA 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 ORA is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of ORA? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!