We Think That There Are Some Issues For Metcash (ASX:MTS) Beyond Its Promising Earnings

Metcash Limited's (ASX:MTS ) stock didn't jump after it announced some healthy earnings. We think that investors might be worried about some concerning underlying factors.

Check out our latest analysis for Metcash

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Metcash expanded the number of shares on issue by 13% over the last year. Therefore, each share now receives a smaller portion of profit. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of Metcash's EPS by clicking here.

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

Metcash has improved its profit over the last three years, with an annualized gain of 7.6% in that time. While we did see a very small decrease, net profit was basically flat over the last year. Meanwhile, EPS was actually down a full 3.8% over the period, highlighting just how different the profits look from a per-share perspective. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, if Metcash'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.

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.

Our Take On Metcash's Profit Performance

Metcash issued shares during the year, and that means its EPS performance lags its net income growth. Therefore, it seems possible to us that Metcash's true underlying earnings power is actually less than its statutory profit. Nonetheless, it's still worth noting that its earnings per share have grown at 10% over the last three years. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Case in point: We've spotted 2 warning signs for Metcash you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Metcash's profit. 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 with significant insider holdings to be useful.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com