Should You Rely On Alliance Aviation Services's (ASX:AQZ) Earnings Growth?

Broadly speaking, profitable businesses are less risky than 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. This article will consider whether Alliance Aviation Services' (ASX:AQZ) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months Alliance Aviation Services made a profit of AU$27.0m on revenue of AU$298.6m. Happily, it has grown both its profit and revenue over the last three years, as you can see in the chart below.

Check out our latest analysis for Alliance Aviation Services

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. In this article we will consider how Alliance Aviation Services' decision to issue new shares in the company has impacted returns to shareholders. 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. As it happens, Alliance Aviation Services issued 26% more new shares over the last year. That means its earnings are split among a greater number of shares. 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 Alliance Aviation Services' EPS by clicking here.

A Look At The Impact Of Alliance Aviation Services' Dilution on Its Earnings Per Share (EPS).

As you can see above, Alliance Aviation Services has been growing its net income over the last few years, with an annualized gain of 45% over three years. But EPS was only up 15% per year, in the exact same period. And in the last year the company managed to bump profit up by 19%. But that's starkly different from the 4.0% drop in earnings per share. So you can see that the dilution has had a fairly significant impact on shareholders.

In the long term, if Alliance Aviation Services' earnings per share can increase, then the share price should too. 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.

Our Take On Alliance Aviation Services' Profit Performance

Each Alliance Aviation Services share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Because of this, we think that it may be that Alliance Aviation Services' statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 15% per annum growth in EPS for the last three. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you'd like to know more about Alliance Aviation Services as a business, it's important to be aware of any risks it's facing. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of Alliance Aviation Services.

This note has only looked at a single factor that sheds light on the nature of Alliance Aviation Services' profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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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