Pipestone Energy (TSE:PIPE) Posted Healthy Earnings But There Are Some Other Factors To Be Aware Of

Last week's profit announcement from Pipestone Energy Corp. (TSE:PIPE) was underwhelming for investors, despite headline numbers being robust. We think that the market might be paying attention to some underlying factors are concerning.

Our analysis indicates that PIPE is potentially undervalued!

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Pipestone Energy increased the number of shares on issue by 46% 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. Check out Pipestone Energy's historical EPS growth by clicking on this link.

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

Three years ago, Pipestone Energy lost money. The good news is that profit was up 1,376% in the last twelve months. On the other hand, earnings per share are only up 1,383% over the same period. So you can see that the dilution has had a fairly significant impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Pipestone Energy can grow EPS persistently. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

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 Pipestone Energy's Profit Performance

Pipestone Energy shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. For this reason, we think that Pipestone Energy's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The silver lining is that its EPS growth over the last year has been really wonderful, even if it's not a perfect measure. 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. If you'd like to know more about Pipestone Energy as a business, it's important to be aware of any risks it's facing. While conducting our analysis, we found that Pipestone Energy has 2 warning signs and it would be unwise to ignore them.

This note has only looked at a single factor that sheds light on the nature of Pipestone Energy'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. 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.