As a general rule, we think profitable companies are less risky than companies that lose money. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. In this article, we'll look at how useful this year's statutory profit is, when analysing Kirkland Lake Gold (TSE:KL).
We like the fact that Kirkland Lake Gold made a profit of US$724.3m on its revenue of US$2.18b, in the last year. Happily, it has grown both its profit and revenue over the last three years, as you can see in the chart below.
Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. In this article we'll look at how Kirkland Lake Gold is impacting shareholders by issuing new shares. 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.
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Kirkland Lake Gold increased the number of shares on issue by 30% over the last twelve months by issuing new shares. That means its earnings are split among 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. Check out Kirkland Lake Gold's historical EPS growth by clicking on this link.
How Is Dilution Impacting Kirkland Lake Gold's Earnings Per Share? (EPS)
As you can see above, Kirkland Lake Gold has been growing its net income over the last few years, with an annualized gain of 572% over three years. But EPS was only up 407% per year, in the exact same period. And at a glance the 45% gain in profit over the last year impresses. On the other hand, earnings per share are only up 20% in that time. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.
In the long term, earnings per share growth should beget share price growth. So Kirkland Lake Gold 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.
Our Take On Kirkland Lake Gold's Profit Performance
Kirkland Lake Gold shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Therefore, it seems possible to us that Kirkland Lake Gold's true underlying earnings power is actually less than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you want to do dive deeper into Kirkland Lake Gold, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 3 warning signs for Kirkland Lake Gold and you'll want to know about these.
Today we've zoomed in on a single data point to better understand the nature of Kirkland Lake Gold's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. 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. 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.
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