We're Not Counting On Select Harvests (ASX:SHV) To Sustain Its Statutory Profitability

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. 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. In this article, we'll look at how useful this year's statutory profit is, when analysing Select Harvests (ASX:SHV).

We like the fact that Select Harvests made a profit of AU$25.0m on its revenue of AU$247.9m, in the last year.

View our latest analysis for Select Harvests

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 Select Harvests 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. In fact, Select Harvests increased the number of shares on issue by 25% over the last twelve months by issuing new shares. 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. Check out Select Harvests' historical EPS growth by clicking on this link.

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

We don't have any data on the company's profits from three years ago. And even focusing only on the last twelve months, we see profit is down 53%. Sadly, earnings per share fell further, down a full 53% in that time. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

If Select Harvests' 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 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 Select Harvests' Profit Performance

Select Harvests issued shares during the year, and that means its EPS performance lags its net income growth. Therefore, it seems possible to us that Select Harvests' true underlying earnings power is actually less than its statutory profit. In further bad news, its earnings per share decreased in the last year. 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 if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. In terms of investment risks, we've identified 4 warning signs with Select Harvests, and understanding these should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Select Harvests' 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. 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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