Is Pilbara Minerals the most profitable ASX lithium share?

Could Pilbara shares be the very best in terms of earnings margin?

Mitchell Lawler

Mitchell stumbled upon the concept of investing when in high school, devotedly urging his parents to put some money into a handful of technology companies with increasingly popular products among his demographic – many of which have gone on to great success. It wouldn’t be until 2017, some five years later, that Mitchell became an investor of his own money. Having studied and worked as a mechanical engineer in the building services industry, Mitchell takes a methodical and analytical approach to evaluating businesses. Rather than relying purely on numbers, Mitchell drills beyond a company’s metaphorical mantle to unearth obscure patterns or competitive advantages that would go otherwise unnoticed. His expertise resides within areas such as software, consumer goods, and building services equipment. However, his quest to find quality companies that set the industry standard and flex some degree of an impenetrable position has no limits – small cap to mega cap, cosmetics to healthcare – if it’s an exceptional business it’s on his radar.

Published October 14, 2022 1:54 pm AEDT

Shares in Pilbara Minerals Ltd (ASX: PLS) are among a select few that have delivered handsome gains so far this year.

Soaring lithium demand has helped push prices for the material to record levels. In turn, producing mining companies have enjoyed supersized earnings in the most recent financial year.

Pilbara Minerals is one ASX-listed lithium share that has cashed in on the recent demand. However, is it the crème de la crème when it comes to profitability?

Here's a closer look at how this lithium heavyweight shapes up on the bottom line.

A beautiful ocean vista is shown with a woman whose back is to the camera holding her arms up in triumph as she stands at the top of a rock feeling thrilled that ASX 200 shares are reaching multi-year high prices today — Image source: Getty Images

Pitting Pilbara Minerals against its peers

The importance of profitability is generally uncontested. Without it, companies fail to provide any form of return to shareholders.

In fact, even the great Warren Buffett has been quoted as saying, "Look for companies with high-profit margins."

The illustrious investor believes the earnings margin indicates whether the company has a competitive advantage over its peers.

For Pilbara Minerals shares, the numbers paint a rosy picture. For 12 months ending 30 June 2022, the company raked in $1.19 billion in revenue. This represented a 577% increase in Pilbara's prior full-year revenue.

Most of this substantial revenue increase was attributable to increased realised prices for its spodumene concentrate. That meant profits similarly swelled to record levels for the company, hitting $561.8 million during the period.

To make this comparable to other ASX lithium shares, we need to determine the net profit margin.

Fortunately, that is as simple as dividing the earnings by the revenue, which gives us 47.2%. In other words, for every dollar that Pilbara Minerals made in revenue, it retained 47.2 cents after expenses.

It turns out this is the highest profit margin for a lithium producer on the ASX. Making an investment in Pilbara Minerals shares an investment in the most profitable name in the game.

For reference, the next closest names are Allkem Ltd (ASX: AKE) and IGO Ltd (ASX: IGO) with profit margins of 39.7% and 36.7% respectively.

Can it continue?

As noted above, Pilbara Minerals' profit margin is heavily dependent on where the lithium price goes from here.

Given the company operates in what is referred to as a 'price takers' industry, as opposed to a 'price maker', there is a risk the succulent profits will incentivise more operators to get in on the action. All else equal, this would put downward pressure on the price of lithium due to supply and demand dynamics.

Yet, analysts at Citi suspect elevated lithium prices are here to stay. The team there is projecting demand to double every two to three years over the ensuing decade.

Whichever way it pans out, future Pilbara Minerals share price returns will likely depend on whether the company's projects hold a competitive advantage to maintain those juicy margins.

The company currently trades on a price-to-earnings (P/E) ratio of 28 times.

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