Here's Why We Don't Think Vivenio Residencial SOCIMI's (BME:YVIV) Statutory Earnings Reflect Its Underlying Earnings Potential

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. This article will consider whether Vivenio Residencial SOCIMI's (BME:YVIV) statutory profits are a good guide to its underlying earnings.

While Vivenio Residencial SOCIMI was able to generate revenue of €23.9m in the last twelve months, we think its profit result of €46.9m was more important.

Check out our latest analysis for Vivenio Residencial SOCIMI

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. Therefore, today we will consider the nature of Vivenio Residencial SOCIMI's statutory earnings with reference to its dilution of shareholders and the impact of unusual items. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Vivenio Residencial SOCIMI.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Vivenio Residencial SOCIMI increased the number of shares on issue by 42% over the last twelve months by issuing new shares. As a result, its net income is now split between a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. You can see a chart of Vivenio Residencial SOCIMI's EPS by clicking here.

A Look At The Impact Of Vivenio Residencial SOCIMI's Dilution on Its Earnings Per Share (EPS).

Unfortunately, we don't have any visibility into its profits three years back, because we lack the data. The good news is that profit was up 22% in the last twelve months. But earnings per share are actually down 46%, over that same period. 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 Vivenio Residencial SOCIMI'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.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted Vivenio Residencial SOCIMI's net profit by €48m 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. We can see that Vivenio Residencial SOCIMI's positive unusual items were quite significant relative to its profit in the year to June 2020. 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 Vivenio Residencial SOCIMI's Profit Performance

To sum it all up, Vivenio Residencial SOCIMI 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. Considering all this we'd argue Vivenio Residencial SOCIMI's profits probably give an overly generous impression of its sustainable level of profitability. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. In terms of investment risks, we've identified 2 warning signs with Vivenio Residencial SOCIMI, and understanding these should be part of your investment process.

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. 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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