Stock Analysis

Tessenderlo Group's (EBR:TESB) Profits Appear To Have Quality Issues

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The market shrugged off Tessenderlo Group NV's (EBR:TESB) solid earnings report. We did some digging and believe investors may be worried about some underlying factors in the report.

Check out our latest analysis for Tessenderlo Group

ENXTBR:TESB Earnings and Revenue History March 31st 2023

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Tessenderlo Group expanded the number of shares on issue by 98% over the last year. 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 Tessenderlo Group's historical EPS growth by clicking on this link.

How Is Dilution Impacting Tessenderlo Group's Earnings Per Share (EPS)?

Tessenderlo Group has improved its profit over the last three years, with an annualized gain of 136% in that time. And at a glance the 21% gain in profit over the last year impresses. On the other hand, earnings per share are only up 21% in that time. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So Tessenderlo Group shareholders will want to see that EPS figure continue to increase. 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 Tessenderlo Group.

The Impact Of Unusual Items On Profit

On top of the dilution, we should also consider the €38m impact of unusual items in the last year, which had the effect of suppressing profit. 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, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Tessenderlo Group to produce a higher profit next year, all else being equal.

Our Take On Tessenderlo Group's Profit Performance

Tessenderlo Group 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, we think it's very unlikely that Tessenderlo Group's statutory profits make it seem much weaker than it is. So while earnings quality is important, it's equally important to consider the risks facing Tessenderlo Group at this point in time. Our analysis shows 2 warning signs for Tessenderlo Group (1 doesn't sit too well with us!) and we strongly recommend you look at them before investing.

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 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. 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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