Why Empresas AquaChile's (SNSE:AQUACHILE) Healthy Earnings Aren’t As Good As They Seem

Solid profit numbers didn't seem to be enough to please Empresas AquaChile S.A.'s (SNSE:AQUACHILE) shareholders. We think that they might be concerned about some underlying details that our analysis found.

See our latest analysis for Empresas AquaChile

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Empresas AquaChile increased the number of shares on issue by 30% over the last twelve months by issuing new shares. 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. You can see a chart of Empresas AquaChile's EPS by clicking here.

A Look At The Impact Of Empresas AquaChile's Dilution on Its Earnings Per Share (EPS).

Unfortunately, Empresas AquaChile's profit is down 53% per year over three years. The good news is that profit was up 6.2% in the last twelve months. But EPS was far less impressive, dropping 17% in that time. This is a great example of why it's rather imprudent to rely only on net income as a growth measure. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

In the long term, if Empresas AquaChile's 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 the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

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

How Do Unusual Items Influence Profit?

Finally, we should also consider the fact that unusual items boosted Empresas AquaChile's net profit by US$425m 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. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. We can see that Empresas AquaChile's positive unusual items were quite significant relative to its profit in the year to March 2021. 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 Empresas AquaChile's Profit Performance

To sum it all up, Empresas AquaChile got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. 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 Empresas AquaChile's statutory profits might make it look better than it really is on an underlying level. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. In terms of investment risks, we've identified 2 warning signs with Empresas AquaChile, and understanding these bad boys should be part of your investment process.

Our examination of Empresas AquaChile 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. 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 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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