TAG Colonia-Immobilien's (HMSE:KBU) Robust Profit May Be Overstating Its True Earnings Potential

Shareholders didn't seem to be thrilled with TAG Colonia-Immobilien AG's (HMSE:KBU) recent earnings report, despite healthy profit numbers. Our analysis suggests they may be concerned about some underlying details.

See our latest analysis for TAG Colonia-Immobilien

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. TAG Colonia-Immobilien expanded the number of shares on issue by 230% over the last year. That means its earnings are split among a greater number of shares. 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 TAG Colonia-Immobilien's EPS by clicking here.

How Is Dilution Impacting TAG Colonia-Immobilien's Earnings Per Share? (EPS)

TAG Colonia-Immobilien was losing money three years ago. On the bright side, in the last twelve months it grew profit by 1,444%. But EPS was less impressive, up only 91% 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 TAG Colonia-Immobilien 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 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 TAG Colonia-Immobilien.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted TAG Colonia-Immobilien's net profit by €536m over the last year. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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, after all, that's exactly what the accounting terminology implies. We can see that TAG Colonia-Immobilien's positive unusual items were quite significant relative to its profit in the year to December 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 TAG Colonia-Immobilien's Profit Performance

In its last report TAG Colonia-Immobilien benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. 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. On reflection, the above-mentioned factors give us the strong impression that TAG Colonia-Immobilien'sunderlying earnings power is not as good as it might seem, based on the statutory profit numbers. So while earnings quality is important, it's equally important to consider the risks facing TAG Colonia-Immobilien at this point in time. When we did our research, we found 5 warning signs for TAG Colonia-Immobilien (2 are a bit concerning!) that we believe deserve your full attention.

Our examination of TAG Colonia-Immobilien 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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.

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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.