Should You Use InvoCare's (ASX:IVC) 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. 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. In this article, we'll look at how useful this year's statutory profit is, when analysing InvoCare (ASX:IVC).

It's good to see that over the last twelve months InvoCare made a profit of AU$4.80m on revenue of AU$486.5m. As you can see in the chart below, its profit has declined over the last three years, even though its revenue has increased.

See our latest analysis for InvoCare

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'll look at how InvoCare 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.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. InvoCare expanded the number of shares on issue by 22% over the last year. That means its earnings are split among a greater number of shares. 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 InvoCare's EPS by clicking here.

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

InvoCare's net profit dropped by 94% per year over the last three years. Even looking at the last year, profit was still down 92%. Sadly, earnings per share fell further, down a full 93% in that time. 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.

If InvoCare'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.

How Do Unusual Items Influence Profit?

On top of the dilution, we should also consider the AU$25m impact of unusual items in the last year, which had the effect of suppressing profit. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. 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 InvoCare to produce a higher profit next year, all else being equal.

Our Take On InvoCare's Profit Performance

To sum it all up, InvoCare 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, it's hard to tell if InvoCare's profits are a reasonable reflection of its underlying profitability. So while earnings quality is important, it's equally important to consider the risks facing InvoCare at this point in time. For example - InvoCare has 5 warning signs we think you should be aware of.

Our examination of InvoCare has focussed on certain factors that can make its earnings look better than they are. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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.

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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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