AltaGas' (TSE:ALA) Problems Go Beyond Weak Profit

The subdued market reaction suggests that AltaGas Ltd.'s (TSE:ALA) recent earnings didn't contain any surprises. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

See our latest analysis for AltaGas

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, AltaGas increased the number of shares on issue by 5.7% 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 AltaGas' historical EPS growth by clicking on this link.

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

As you can see above, AltaGas has been growing its net income over the last few years, with an annualized gain of 12% over three years. Net profit actually dropped by 16% in the last year. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 19%. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, if AltaGas' 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.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that AltaGas' profit was boosted by unusual items worth CA$268m 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 that's as you'd expect, given these boosts are described as 'unusual'. If AltaGas 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 AltaGas' Profit Performance

In its last report AltaGas benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. 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 AltaGas' 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 AltaGas at this point in time. For example, we've found that AltaGas has 4 warning signs (1 shouldn't be ignored!) that deserve your attention before going any further with your analysis.

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 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.