FirstFarms' (CPH:FFARMS) Problems Go Beyond Poor Profit

The recent earnings release from FirstFarms A/S (CPH:FFARMS ) was disappointing to investors. We think that they may have more to worry about than just soft profit numbers.

View our latest analysis for FirstFarms

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, FirstFarms increased the number of shares on issue by 12% over the last twelve months by issuing new shares. 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 FirstFarms' EPS by clicking here.

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

Unfortunately, FirstFarms' profit is down 51% per year over three years. And even focusing only on the last twelve months, we see profit is down 57%. Sadly, earnings per share fell further, down a full 59% in that time. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, if FirstFarms' earnings per share can increase, then the share price should too. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. 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 FirstFarms.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted FirstFarms' net profit by kr.20m over the last year. 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. FirstFarms had a rather significant contribution from unusual items relative to its profit to September 2024. 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 FirstFarms' Profit Performance

To sum it all up, FirstFarms 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 FirstFarms' statutory profits might make it look better than it really is on an underlying level. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Case in point: We've spotted 4 warning signs for FirstFarms you should be mindful of and 1 of these is a bit concerning.

Our examination of FirstFarms 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. 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 with high insider ownership.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.