Here's Why We Don't Think Kojamo Oyj's (HEL:KOJAMO) Statutory Earnings Reflect Its Underlying Earnings Potential

Broadly speaking, profitable businesses are less risky than unprofitable ones. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. This article will consider whether Kojamo Oyj's (HEL:KOJAMO) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months Kojamo Oyj made a profit of €216.1m on revenue of €371.6m. Happily, it has grown both its profit and revenue over the last three years, as you can see in the chart below.

See our latest analysis for Kojamo Oyj

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. In this article we'll look at how Kojamo Oyj is impacting shareholders by issuing new shares, as well as how unusual items have affected the income line. 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.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Kojamo Oyj expanded the number of shares on issue by 5.3% over the last year. Therefore, each share now receives a smaller portion of profit. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out Kojamo Oyj's historical EPS growth by clicking on this link.

A Look At The Impact Of Kojamo Oyj's Dilution on Its Earnings Per Share (EPS).

As you can see above, Kojamo Oyj has been growing its net income over the last few years, with an annualized gain of 27% over three years. And over the last 12 months, the company grew its profit by 3.1%. But that's starkly different from the 2.1% drop in earnings per share. So you can see that the dilution has had a bit of an impact on shareholders.Therefore, the dilution is having a noteworthy influence on shareholder returnsAnd so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, if Kojamo Oyj's earnings per share can increase, then the share price should too. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that Kojamo Oyj's profit was boosted by unusual items worth €112m in the last twelve months. We can't deny that higher profits generally leave us optmistic, but we'd prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that Kojamo Oyj's positive unusual items were quite significant relative to its profit in the year to September 2019. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Kojamo Oyj's Profit Performance

To sum it all up, Kojamo Oyj got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. On top of that, the dilution means that its earnings per share performance is worse than its profit performance. For the reasons mentioned above, we think that a perfunctory glance at Kojamo Oyj's statutory profits might make it look better than it really is on an underlying level. While it's really important to consider how well a company's statutory earnings represent its true earnings power, it's also worth taking a look at what analysts are forecasting for the future. So feel free to check out our free graph representing analyst forecasts.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. But there is always more to discover if you are capable of focussing your mind on minutiae. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.