Sika's (VTX:SIKA) Profits Appear To Have Quality Issues

By
Simply Wall St
Published
February 26, 2022
SWX:SIKA
Source: Shutterstock

Sika AG (VTX:SIKA) just released a solid earnings report, and the stock displayed some strength. While the profit numbers were good, our analysis has found some concerning factors that shareholders should be aware of.

Check out our latest analysis for Sika

earnings-and-revenue-history
SWX:SIKA Earnings and Revenue History February 26th 2022

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Sika issued 8.0% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. 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 Sika's EPS by clicking here.

How Is Dilution Impacting Sika's Earnings Per Share? (EPS)

As you can see above, Sika has been growing its net income over the last few years, with an annualized gain of 53% over three years. And the 27% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 27% in that time. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Sika can grow EPS persistently. 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.

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 Sika's Profit Performance

Each Sika share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Because of this, we think that it may be that Sika's statutory profits are better than its underlying earnings power. Nonetheless, it's still worth noting that its earnings per share have grown at 57% over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing Sika at this point in time. You'd be interested to know, that we found 3 warning signs for Sika and you'll want to know about these.

This note has only looked at a single factor that sheds light on the nature of Sika'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 that insiders are buying.

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