Why Construtora Adolpho Lindenberg's (BVMF:CALI3) Soft Earnings Are Just The Beginning Of Its Problems

Construtora Adolpho Lindenberg S.A.'s (BVMF:CALI3) stock wasn't much affected by its recent lackluster earnings numbers. Our analysis suggests that they may be missing some concerning details underlying the profit numbers.

See our latest analysis for Construtora Adolpho Lindenberg

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, Construtora Adolpho Lindenberg issued 100% more new shares 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. You can see a chart of Construtora Adolpho Lindenberg's EPS by clicking here.

A Look At The Impact Of Construtora Adolpho Lindenberg's Dilution On Its Earnings Per Share (EPS)

Construtora Adolpho Lindenberg was losing money three years ago. Even looking at the last year, profit was still down 6.3%. Sadly, earnings per share fell further, down a full 23% in that time. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

In the long term, if Construtora Adolpho Lindenberg's 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Construtora Adolpho Lindenberg.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that Construtora Adolpho Lindenberg's profit was boosted by unusual items worth R$1.9m in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. If Construtora Adolpho Lindenberg doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Construtora Adolpho Lindenberg's Profit Performance

In its last report Construtora Adolpho Lindenberg benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. And furthermore, it went and issued plenty of new shares, ensuring that each shareholder (who did not tip more money in) now owns a smaller proportion of the company. Considering all this we'd argue Construtora Adolpho Lindenberg's profits probably give an overly generous impression of its sustainable level of profitability. So while earnings quality is important, it's equally important to consider the risks facing Construtora Adolpho Lindenberg at this point in time. Be aware that Construtora Adolpho Lindenberg is showing 7 warning signs in our investment analysis and 4 of those can't be ignored...

Our examination of Construtora Adolpho Lindenberg 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 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. 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.