Why Yangarra Resources' (TSE:YGR) Shaky Earnings Are Just The Beginning Of Its Problems

Last week's earnings announcement from Yangarra Resources Ltd. (TSE:YGR) was disappointing to investors, with a sluggish profit figure. We did some analysis, and found that there are some reasons to be cautious about the headline numbers.

Check out our latest analysis for Yangarra Resources

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Yangarra Resources expanded the number of shares on issue by 8.3% over the last year. Therefore, each share now receives a smaller portion of profit. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. You can see a chart of Yangarra Resources' EPS by clicking here.

How Is Dilution Impacting Yangarra Resources' Earnings Per Share (EPS)?

As you can see above, Yangarra Resources has been growing its net income over the last few years, with an annualized gain of 863% over three years. In comparison, earnings per share only gained 782% over the same period. Net income was down 56% over the last twelve months. But the EPS result was even worse, with the company recording a decline of 59%. So you can see that the dilution has had a bit of an impact on shareholders.

If Yangarra Resources' 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 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 Yangarra Resources' profit was boosted by unusual items worth CA$7.0m 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 Yangarra Resources 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 Yangarra Resources' Profit Performance

To sum it all up, Yangarra Resources got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. And furthermore, it went and issued plenty of new shares, ensuring that each shareholder (who did not tip more money in) now owns a smaller proportion of the company. For the reasons mentioned above, we think that a perfunctory glance at Yangarra Resources' statutory profits might make it look better than it really is on an underlying level. If you'd like to know more about Yangarra Resources as a business, it's important to be aware of any risks it's facing. In terms of investment risks, we've identified 3 warning signs with Yangarra Resources, and understanding these bad boys should be part of your investment process.

Our examination of Yangarra Resources 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 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 that insiders are buying 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.