There May Be Reason For Hope In Evolution Mining's (ASX:EVN) Disappointing Earnings

The market for Evolution Mining Limited's (ASX:EVN) shares didn't move much after it posted weak earnings recently. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

View our latest analysis for Evolution Mining

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Evolution Mining issued 8.2% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. You can see a chart of Evolution Mining's EPS by clicking here.

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

Evolution Mining's net profit dropped by 58% per year over the last three years. And even focusing only on the last twelve months, we see profit is down 52%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 52% in the same period. So you can see that the dilution has had a bit of an impact on shareholders.

If Evolution Mining's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that Evolution Mining's profit suffered from unusual items, which reduced profit by AU$70m in the last twelve months. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. If Evolution Mining 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 Evolution Mining's Profit Performance

Evolution Mining 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 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 Evolution Mining's profits are a reasonable reflection of its underlying profitability. If you'd like to know more about Evolution Mining as a business, it's important to be aware of any risks it's facing. In terms of investment risks, we've identified 4 warning signs with Evolution Mining, and understanding them should be part of your investment process.

Our examination of Evolution Mining 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. 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.