Here's Why We Don't Think Incap Oyj's (HEL:ICP1V) Statutory Earnings Reflect Its Underlying Earnings Potential

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. Today we'll focus on whether this year's statutory profits are a good guide to understanding Incap Oyj (HEL:ICP1V).

We like the fact that Incap Oyj made a profit of €4.66m on its revenue of €81.4m, in the last year. In the chart below, you can see that its profit and revenue have both grown over the last three years, although its profit has slipped in the last twelve months.

See our latest analysis for Incap Oyj

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. In this article we will consider how Incap Oyj's decision to issue new shares in the company has impacted returns to shareholders. 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.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, Incap Oyj issued 33% more new shares over the last year. 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. You can see a chart of Incap Oyj's EPS by clicking here.

How Is Dilution Impacting Incap Oyj's Earnings Per Share? (EPS)

As you can see above, Incap Oyj has been growing its net income over the last few years, with an annualized gain of 93% over three years. Net income was down 42% over the last twelve months. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 42%. So you can see that the dilution has had a fairly significant impact on shareholders.

In the long term, if Incap Oyj's 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.

Our Take On Incap Oyj's Profit Performance

Over the last year Incap Oyj issued new shares and so, there's a noteworthy divergence between EPS and net income growth. For this reason, we think that Incap Oyj's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But the good news is that its EPS growth over the last three years has been very impressive. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing Incap Oyj at this point in time. You'd be interested to know, that we found 5 warning signs for Incap Oyj and you'll want to know about them.

Today we've zoomed in on a single data point to better understand the nature of Incap Oyj's profit. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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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