Here's Why We Don't Think Credit Intelligence's (ASX:CI1) Statutory Earnings Reflect Its Underlying Earnings Potential

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 Credit Intelligence's (ASX:CI1) statutory profits are a good guide to its underlying earnings.

While Credit Intelligence was able to generate revenue of AU$13.6m in the last twelve months, we think its profit result of AU$2.54m was more important.

Check out our latest analysis for Credit Intelligence

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. In this article we will consider how Credit Intelligence's decision to issue new shares in the company has impacted returns to shareholders. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Credit Intelligence.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, Credit Intelligence increased the number of shares on issue by 24% over the last twelve months by issuing new shares. That means its earnings are split among a greater number of shares. 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 Credit Intelligence's EPS by clicking here.

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

We don't have any data on the company's profits from three years ago. On the bright side, in the last twelve months it grew profit by 379%. But EPS was less impressive, up only 288% in that time. So you can see that the dilution has had a fairly significant impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So Credit Intelligence shareholders will want to see that EPS figure continue to increase. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. 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 Credit Intelligence's Profit Performance

Credit Intelligence shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Because of this, we think that it may be that Credit Intelligence's statutory profits are better than its underlying earnings power. The silver lining is that its EPS growth over the last year has been really wonderful, even if it's not a perfect measure. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing Credit Intelligence at this point in time. Case in point: We've spotted 3 warning signs for Credit Intelligence you should be mindful of and 1 of them is a bit unpleasant.

This note has only looked at a single factor that sheds light on the nature of Credit Intelligence'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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