Maxim Power's (TSE:MXG) Earnings Quality Is Low

After announcing weak earnings, Maxim Power Corp.'s (TSE:MXG) stock was strong. Despite the strength in the stock, we feel that investors should be cautious about some numbers in the earnings.

Check out our latest analysis for Maxim Power

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, Maxim Power issued 33% more new shares over the last year. That means its earnings are split among a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of Maxim Power's EPS by clicking here.

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

Maxim Power has improved its profit over the last three years, with an annualized gain of 206% in that time. Net profit actually dropped by 33% in the last year. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 33%. So you can see that the dilution has had a fairly significant impact on shareholders.

In the long term, if Maxim Power'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.

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

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted Maxim Power's net profit by CA$56m 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'. We can see that Maxim Power's positive unusual items were quite significant relative to its profit in the year to December 2023. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Maxim Power's Profit Performance

In its last report Maxim Power benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. On top of that, the dilution means that its earnings per share performance is worse than its profit performance. For the reasons mentioned above, we think that a perfunctory glance at Maxim Power's statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into Maxim Power, you'd also look into what risks it is currently facing. For example, we've discovered 2 warning signs that you should run your eye over to get a better picture of Maxim Power.

Our examination of Maxim Power 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. 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 that insiders are buying.

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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.