Impressive Earnings May Not Tell The Whole Story For Energisa (BVMF:ENGI3)

Despite announcing strong earnings, Energisa S.A.'s (BVMF:ENGI3) stock was sluggish. We think that the market might be paying attention to some underlying factors that they find to be concerning.

See our latest analysis for Energisa

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Energisa expanded the number of shares on issue by 12% 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 Energisa's EPS by clicking here.

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

Energisa has improved its profit over the last three years, with an annualized gain of 7.8% in that time. In contrast, earnings per share were actually down by 12% per year, in the exact same period. And the 39% profit boost in the last year certainly seems impressive at first glance. But in comparison, EPS only increased by 27% over the same period. And so, you can see quite clearly that dilution is influencing shareholder earnings.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Energisa 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.

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.

Our Take On Energisa's Profit Performance

Energisa shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Because of this, we think that it may be that Energisa's statutory profits are better than its underlying earnings power. The good news is that, its earnings per share increased by 27% in the last year. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example, we've discovered 2 warning signs that you should run your eye over to get a better picture of Energisa.

Today we've zoomed in on a single data point to better understand the nature of Energisa's 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 with high insider ownership.

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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.