Solid Earnings May Not Tell The Whole Story For Exchange Income (TSE:EIF)

Exchange Income Corporation's (TSE:EIF) robust recent earnings didn't do much to move the stock. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.

View our latest analysis for Exchange Income

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Exchange Income expanded the number of shares on issue by 5.1% over the last year. 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. You can see a chart of Exchange Income's EPS by clicking here.

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

As you can see above, Exchange Income has been growing its net income over the last few years, with an annualized gain of 77% over three years. But EPS was only up 38% per year, in the exact same period. While we did see a very small decrease, net profit was basically flat over the last year. Meanwhile, EPS was actually down a full 6.3% over the period, highlighting just how different the profits look from a per-share perspective. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, if Exchange Income's earnings per share can increase, then the share price should too. 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.

Our Take On Exchange Income's Profit Performance

Exchange Income issued shares during the year, and that means its EPS performance lags its net income growth. Because of this, we think that it may be that Exchange Income's statutory profits are better than its underlying earnings power. Nonetheless, it's still worth noting that its earnings per share have grown at 38% over the last three years. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Every company has risks, and we've spotted 2 warning signs for Exchange Income you should know about.

This note has only looked at a single factor that sheds light on the nature of Exchange Income's profit. 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. 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.

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.