Investors Shouldn't Be Too Comfortable With TORM's (CPH:TRMD A) Earnings

Despite posting some strong earnings, the market for TORM plc's (CPH:TRMD A) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

See our latest analysis for TORM

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, TORM issued 11% more new shares 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. Check out TORM's historical EPS growth by clicking on this link.

A Look At The Impact Of TORM's Dilution On Its Earnings Per Share (EPS)

We don't have any data on the company's profits from three years ago. On the bright side, in the last twelve months it grew profit by 15%. On the other hand, earnings per share are only up 12% over the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

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

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.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that TORM's profit was boosted by unusual items worth US$50m in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. If TORM doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On TORM's Profit Performance

In its last report TORM 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. Considering all this we'd argue TORM's profits probably give an overly generous impression of its sustainable level of profitability. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example, we've found that TORM has 4 warning signs (1 can't be ignored!) that deserve your attention before going any further with your analysis.

Our examination of TORM 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.