Shaky Earnings May Not Tell The Whole Story For FirstFarms (CPH:FFARMS)

FirstFarms A/S (CPH:FFARMS) recently posted soft earnings but shareholders didn't react strongly. Our analysis suggests that they may be missing some concerning details underlying the profit numbers.

See our latest analysis for FirstFarms

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, FirstFarms increased the number of shares on issue by 18% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. 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 FirstFarms' historical EPS growth by clicking on this link.

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

FirstFarms has improved its profit over the last three years, with an annualized gain of 5.0% in that time. But on the other hand, earnings per share actually fell by 20% per year. Net income was down 60% over the last twelve months. But the EPS result was even worse, with the company recording a decline of 62%. Therefore, the dilution is having a noteworthy influence on shareholder returns.

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 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 FirstFarms.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that FirstFarms' profit was boosted by unusual items worth kr.15m in the last twelve months. 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 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. Which is hardly surprising, given the name. FirstFarms had a rather significant contribution from unusual items relative to its profit to December 2023. 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. 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 FirstFarms' profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into FirstFarms, you'd also look into what risks it is currently facing. Be aware that FirstFarms is showing 4 warning signs in our investment analysis and 1 of those is significant...

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. 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.