Statutory Profit Doesn't Reflect How Good Gaussin's (EPA:ALGAU) Earnings Are

When companies post strong earnings, the stock generally performs well, just like Gaussin SA's (EPA:ALGAU) stock has recently. Our analysis found some more factors that we think are good for shareholders.

View our latest analysis for Gaussin

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Gaussin expanded the number of shares on issue by 6.6% over the last year. That means its earnings are split among a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of Gaussin's EPS by clicking here.

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

Three years ago, Gaussin lost money. Zooming in to the last year, we still can't talk about growth rates coherently, since it made a loss last year. What we do know is that while it's great to see a profit over the last twelve months, that profit would have been better, on a per share basis, if the company hadn't needed to issue shares. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, if Gaussin'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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Gaussin.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that Gaussin's profit suffered from unusual items, which reduced profit by €607k in the last twelve months. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. 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. Assuming those unusual expenses don't come up again, we'd therefore expect Gaussin to produce a higher profit next year, all else being equal.

Our Take On Gaussin's Profit Performance

To sum it all up, Gaussin took a hit from unusual items which pushed its profit down; without that, it would have made more money. But unfortunately the dilution means that shareholders now own a smaller proportion of the company (assuming they maintained the same number of shares). That will weigh on earnings per share, even if it is not reflected in net income. Based on these factors, it's hard to tell if Gaussin's profits are a reasonable reflection of its underlying profitability. So while earnings quality is important, it's equally important to consider the risks facing Gaussin at this point in time. For instance, we've identified 3 warning signs for Gaussin (1 doesn't sit too well with us) you should be familiar with.

Our examination of Gaussin has focussed on certain factors that can make its earnings look better than they are. 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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