Halmont Properties' (CVE:HMT) Anemic Earnings Might Be Worse Than You Think

A lackluster earnings announcement from Halmont Properties Corporation (CVE:HMT) last week didn't sink the stock price. We think that investors are worried about some weaknesses underlying the earnings.

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Halmont Properties expanded the number of shares on issue by 25% 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 Halmont Properties' EPS by clicking here.

A Look At The Impact Of Halmont Properties' Dilution On Its Earnings Per Share (EPS)

As you can see above, Halmont Properties has been growing its net income over the last few years, with an annualized gain of 33% over three years. In comparison, earnings per share only gained 12% over the same period. Net profit actually dropped by 10% in the last year. But the EPS result was even worse, with the company recording a decline of 26%. So you can see that the dilution has had a fairly significant impact on shareholders.

If Halmont Properties' 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 the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Halmont Properties.

How Do Unusual Items Influence Profit?

Finally, we should also consider the fact that unusual items boosted Halmont Properties' net profit by CA$5.8m over the last year. 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 that's as you'd expect, given these boosts are described as 'unusual'. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Halmont Properties' Profit Performance

To sum it all up, Halmont Properties 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 Halmont Properties' statutory profits might make it look better than it really is on an underlying level. So while earnings quality is important, it's equally important to consider the risks facing Halmont Properties at this point in time. When we did our research, we found 5 warning signs for Halmont Properties (2 can't be ignored!) that we believe deserve your full attention.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. But there are plenty of other ways to inform your opinion of a company. 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 with significant insider holdings to be useful.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.