Shareholders Shouldn’t Be Too Comfortable With Argosy Minerals' (ASX:AGY) Strong Earnings

Strong earnings weren't enough to please Argosy Minerals Limited's (ASX:AGY) shareholders over the last week. We did some digging and found some underlying numbers that are worrying.

See our latest analysis for Argosy Minerals

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Argosy Minerals increased the number of shares on issue by 8.2% 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. Check out Argosy Minerals' historical EPS growth by clicking on this link.

How Is Dilution Impacting Argosy Minerals' Earnings Per Share? (EPS)

Three years ago, Argosy Minerals lost money. Zooming in to the last year, we still can't talk about growth rates coherently, since it made a loss last year. What we do know is that while it's great to see a profit over the last twelve months, that profit would have been better, on a per share basis, if the company hadn't needed to issue shares. Therefore, the dilution is having a noteworthy influence on shareholder returns.

If Argosy Minerals' 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Argosy Minerals.

Operating Revenue Or Not?

Companies will classify their revenue streams as either operating revenue or other revenue. Oftentimes, non-operating revenue spikes are not repeated, so it makes sense to be cautious where non-operating revenue has made a very large contribution to total profit. However, we note that when non-operating revenue increases suddenly, it will sometimes generate an unsustainable boost to profit. Alongside the dilution mentioned above, we think shareholders should note that Argosy Minerals had a significant increase in non-operating revenue over the last year. Indeed, its non-operating revenue rose from AU$50.3k last year to AU$68.5k this year. The high levels of non-operating revenue are problematic because if (and when) they do not repeat, then overall revenue (and profitability) of the firm will fall. In order to better understand a company's profit result, it can sometimes help to consider whether the result would be very different without a sudden increase in non-operating revenue.

Our Take On Argosy Minerals' Profit Performance

In its last report Argosy Minerals benefitted from a spike in non-operating revenue which may make its top line look unsustainably good, and even flow down to its profit. And the fact that it issued more shares means that its results look weaker from a per-share perspective. Considering all this we'd argue Argosy Minerals' profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into Argosy Minerals, you'd also look into what risks it is currently facing. Be aware that Argosy Minerals is showing 3 warning signs in our investment analysis and 1 of those makes us a bit uncomfortable...

Our examination of Argosy Minerals has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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. 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.