InPlay Oil's (TSE:IPO) Sluggish Earnings Might Be Just The Beginning Of Its Problems

The market rallied behind InPlay Oil Corp.'s (TSE:IPO) stock, leading do a rise in the share price after its recent weak earnings report. While shareholders may be willing to overlook soft profit numbers, we believe that they should also be taking into account some other factors which may be cause for concern.

Our free stock report includes 4 warning signs investors should be aware of before investing in InPlay Oil. Read for free now.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, InPlay Oil issued 86% more new shares over the last year. As a result, its net income is now split between a greater number of shares. 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 InPlay Oil's EPS by clicking here.

A Look At The Impact Of InPlay Oil's Dilution On Its Earnings Per Share (EPS)

Unfortunately, InPlay Oil's profit is down 97% per year over three years. And even focusing only on the last twelve months, we see profit is down 80%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 81% in the same period. So you can see that the dilution has had a fairly significant impact on shareholders.

If InPlay Oil's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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 InPlay Oil's Profit Performance

InPlay Oil issued shares during the year, and that means its EPS performance lags its net income growth. For this reason, we think that InPlay Oil's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. In further bad news, its earnings per share decreased 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 while earnings quality is important, it's equally important to consider the risks facing InPlay Oil at this point in time. Every company has risks, and we've spotted 4 warning signs for InPlay Oil (of which 2 don't sit too well with us!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of InPlay Oil's profit. 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. 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.