Should You Rely On Novavest Real Estate's (VTX:NREN) Earnings Growth?

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. In this article, we'll look at how useful this year's statutory profit is, when analysing Novavest Real Estate (VTX:NREN).

While Novavest Real Estate was able to generate revenue of CHF22.5m in the last twelve months, we think its profit result of CHF16.0m was more important. One positive is that it has grown both its profit and its revenue, over the last few years.

View our latest analysis for Novavest Real Estate

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. Therefore, today we will consider the nature of Novavest Real Estate's statutory earnings with reference to its dilution of shareholders and the impact of unusual items. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Novavest Real Estate.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Novavest Real Estate 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. 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. Check out Novavest Real Estate's historical EPS growth by clicking on this link.

A Look At The Impact Of Novavest Real Estate's Dilution on Its Earnings Per Share (EPS).

As you can see above, Novavest Real Estate has been growing its net income over the last few years, with an annualized gain of 90% over three years. But EPS was only up 10% per year, in the exact same period. And at a glance the 42% gain in profit over the last year impresses. On the other hand, earnings per share are only up 25% in that time. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Novavest Real Estate shareholders will want to see that EPS figure continue to increase. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

How Do Unusual Items Influence Profit?

Finally, we should also consider the fact that unusual items boosted Novavest Real Estate's net profit by CHF8.0m over the last year. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. Novavest Real Estate had a rather significant contribution from unusual items relative to its profit to June 2020. 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 Novavest Real Estate's Profit Performance

To sum it all up, Novavest Real Estate 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. Considering all this we'd argue Novavest Real Estate's profits probably give an overly generous impression of its sustainable level of profitability. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For example, Novavest Real Estate has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

Our examination of Novavest Real Estate 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 is always more to discover if you are capable of focussing your mind on minutiae. 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. 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.
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