Steppe Gold's (TSE:STGO) Problems Go Beyond Weak Profit

Steppe Gold Ltd.'s (TSE:STGO) earnings announcement last week contained some soft numbers, disappointing investors. We did some digging and believe that things are better than they seem due to some encouraging factors.

View our latest analysis for Steppe Gold

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Steppe Gold expanded the number of shares on issue by 47% over the last year. Therefore, each share now receives a smaller portion of profit. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. You can see a chart of Steppe Gold's EPS by clicking here.

How Is Dilution Impacting Steppe Gold's Earnings Per Share (EPS)?

Steppe Gold was losing money three years ago. And even focusing only on the last twelve months, we see profit is down 41%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 54% in the same period. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

If Steppe Gold's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that Steppe Gold's profit suffered from unusual items, which reduced profit by US$4.0m in the last twelve months. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Steppe Gold to produce a higher profit next year, all else being equal.

Our Take On Steppe Gold's Profit Performance

To sum it all up, Steppe Gold took a hit from unusual items which pushed its profit down; without that, it would have made more money. But unfortunately the dilution means that shareholders now own a smaller proportion of the company (assuming they maintained the same number of shares). That will weigh on earnings per share, even if it is not reflected in net income. Based on these factors, we think it's very unlikely that Steppe Gold's statutory profits make it seem much weaker than it is. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. While conducting our analysis, we found that Steppe Gold has 5 warning signs and it would be unwise to ignore them.

Our examination of Steppe Gold has focussed on certain factors that can make its earnings look better than they are. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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This article by Simply Wall St 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. Simply Wall St has no position in any stocks mentioned.