Here's Why We Don't Think Varia US Properties's (VTX:VARN) Statutory Earnings Reflect Its Underlying Earnings Potential

As a general rule, we think profitable companies are less risky than companies that lose money. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. Today we'll focus on whether this year's statutory profits are a good guide to understanding Varia US Properties (VTX:VARN).

We like the fact that Varia US Properties made a profit of US$27.4m on its revenue of US$106.2m, in the last year. Happily, it has grown both its profit and revenue over the last three years (though we note its profit is down over the last year).

View our latest analysis for Varia US Properties

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. Therefore, today we will consider the nature of Varia US Properties' 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 Varia US Properties.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Varia US Properties expanded the number of shares on issue by 12% over the last year. Therefore, each share now receives a smaller portion of profit. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out Varia US Properties' historical EPS growth by clicking on this link.

A Look At The Impact Of Varia US Properties' Dilution on Its Earnings Per Share (EPS).

Varia US Properties has improved its profit over the last three years, with an annualized gain of 56% in that time. In contrast, earnings per share were actually down by 11% per year, in the exact same period. Net profit actually dropped by 22% in the last year. But the EPS result was even worth, with the company recording a decline of 22%. So you can see that the dilution has had a bit of an impact on shareholders. Therefore, the dilution is having a noteworthy influence on shareholder returns. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, if Varia US Properties' earnings per share can increase, then the share price should too. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. 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.

How Do Unusual Items Influence Profit?

Finally, we should also consider the fact that unusual items boosted Varia US Properties' net profit by US$20m 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. We can see that Varia US Properties' positive unusual items were quite significant relative to its profit in the year to June 2020. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Varia US Properties' Profit Performance

To sum it all up, Varia US Properties 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. For the reasons mentioned above, we think that a perfunctory glance at Varia US Properties' 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 Varia US Properties at this point in time. Our analysis shows 5 warning signs for Varia US Properties (1 is a bit unpleasant!) and we strongly recommend you look at these before investing.

Our examination of Varia US Properties 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. 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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