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

Tourmaline Oil Corp.'s (TSE:TOU) recent weak earnings report didn't cause a big stock movement. However, we believe that investors should be aware of some underlying factors which may be of concern.

Our free stock report includes 1 warning sign investors should be aware of before investing in Tourmaline Oil. Read for free now.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Tourmaline Oil issued 6.5% 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 Tourmaline Oil's EPS by clicking here.

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

Tourmaline Oil's net profit dropped by 50% per year over the last three years. Even looking at the last year, profit was still down 29%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 32% in the same period. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, if Tourmaline Oil'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 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.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that Tourmaline Oil's profit was boosted by unusual items worth CA$264m 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. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And, after all, that's exactly what the accounting terminology implies. If Tourmaline Oil 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 Tourmaline Oil's Profit Performance

To sum it all up, Tourmaline Oil got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. On top of that, the dilution means that its earnings per share performance is worse than its profit performance. Considering all this we'd argue Tourmaline Oil's profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about Tourmaline Oil as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 1 warning sign for Tourmaline Oil you should be aware of.

Our examination of Tourmaline Oil 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 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.