Treasury Wine Estates' (ASX:TWE) Conservative Accounting Might Explain Soft Earnings

Shareholders appeared unconcerned with Treasury Wine Estates Limited's (ASX:TWE) lackluster earnings report last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

View our latest analysis for Treasury Wine Estates

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Treasury Wine Estates increased the number of shares on issue by 12% over the last twelve months by issuing new shares. 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 Treasury Wine Estates' EPS by clicking here.

How Is Dilution Impacting Treasury Wine Estates' Earnings Per Share (EPS)?

Treasury Wine Estates has improved its profit over the last three years, with an annualized gain of 53% in that time. Net income was down 32% over the last twelve months. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 33%. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, if Treasury Wine Estates' 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 the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

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.

The Impact Of Unusual Items On Profit

On top of the dilution, we should also consider the AU$119m 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. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. If Treasury Wine Estates doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Treasury Wine Estates' Profit Performance

Treasury Wine Estates suffered from unusual items which depressed its profit in its last report; if that is not repeated then profit should be higher, all else being equal. But on the other hand, the company issued more shares, so without buying more shares each shareholder will end up with a smaller part of the profit. Based on these factors, it's hard to tell if Treasury Wine Estates' profits are a reasonable reflection of its underlying profitability. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Case in point: We've spotted 4 warning signs for Treasury Wine Estates you should be mindful of and 1 of them is significant.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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. 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.