Metalfrio Solutions' (BVMF:FRIO3) Earnings Are Of Questionable Quality

Despite posting some strong earnings, the market for Metalfrio Solutions S.A.'s (BVMF:FRIO3) stock hasn't moved much. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

View our latest analysis for Metalfrio Solutions

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Metalfrio Solutions increased the number of shares on issue by 53% over the last twelve months by issuing new shares. That means its earnings are split among a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of Metalfrio Solutions' EPS by clicking here.

A Look At The Impact Of Metalfrio Solutions' Dilution On Its Earnings Per Share (EPS)

Metalfrio Solutions was losing money three years ago. And even focusing only on the last twelve months, we don't have a meaningful growth rate because it made a loss a year ago, too. But mathematics aside, it is always good to see when a formerly unprofitable business come good (though we accept profit would have been higher if dilution had not been required). So you can see that the dilution has had a fairly significant impact on shareholders.

If Metalfrio Solutions' 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.

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

How Do Unusual Items Influence Profit?

On top of the dilution, we should also consider the R$20m impact of unusual items in the last year, which had the effect of suppressing profit. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. If Metalfrio Solutions 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 Metalfrio Solutions' Profit Performance

To sum it all up, Metalfrio Solutions took a hit from unusual items which pushed its profit down; without that, it would have made more money. 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, we think it's very unlikely that Metalfrio Solutions' statutory profits make it seem much weaker than it is. If you'd like to know more about Metalfrio Solutions as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 4 warning signs for Metalfrio Solutions (of which 2 make us uncomfortable!) you should know about.

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. 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 with significant insider holdings 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.