Should You Use Qantas Airways’s (ASX:QAN) Statutory Earnings To Analyse It?

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. This article will consider whether Qantas Airways‘s (ASX:QAN) statutory profits are a good guide to its underlying earnings.

We like the fact that Qantas Airways made a profit of AU$873.0m on its revenue of AU$18.2b, in the last year. We can see in the depiction below that while it did manage to grow its revenue over the last three years, profit has been pretty flat.

See our latest analysis for Qantas Airways

ASX:QAN Earnings and Revenue History July 10th 2020
ASX:QAN Earnings and Revenue History July 10th 2020

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. In this article we’ll look at how Qantas Airways is impacting shareholders by issuing new shares. 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.

To understand the value of a company’s earnings growth, it is imperative to consider any dilution of shareholders’ interests. Qantas Airways expanded the number of shares on issue by 19% 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 Qantas Airways’s EPS by clicking here.

How Is Dilution Impacting Qantas Airways’s Earnings Per Share? (EPS)

As you can see above, Qantas Airways’s net profit is roughly the same as what it was three years ago. The fact that profit was up 6.3% last year gives a good impression. On the other hand, earnings per share are only up 14% in the same time frame. 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 returns. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, earnings per share growth should beget share price growth. So Qantas Airways shareholders will want to see that EPS figure continue to increase. 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.

Our Take On Qantas Airways’s Profit Performance

Qantas Airways shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Therefore, it seems possible to us that Qantas Airways’s true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 26% per annum growth in EPS for the last three. At the end of the day, it’s essential to consider more than just the factors above, if you want to understand the company properly. With this in mind, we wouldn’t consider investing in a stock unless we had a thorough understanding of the risks. Every company has risks, and we’ve spotted 3 warning signs for Qantas Airways you should know about.

This note has only looked at a single factor that sheds light on the nature of Qantas Airways’s profit. But there are plenty of other ways to inform your opinion of a company. 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. 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. 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.
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