Weak Statutory Earnings May Not Tell The Whole Story For Sartorius Stedim Biotech (EPA:DIM)

Sartorius Stedim Biotech S.A.'s (EPA:DIM) recent weak earnings report didn't cause a big stock movement. We think that investors are worried about some weaknesses underlying the earnings.

Check out our latest analysis for Sartorius Stedim Biotech

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Sartorius Stedim Biotech increased the number of shares on issue by 5.6% 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 Sartorius Stedim Biotech's EPS by clicking here.

A Look At The Impact Of Sartorius Stedim Biotech's Dilution On Its Earnings Per Share (EPS)

Sartorius Stedim Biotech's net profit dropped by 7.8% per year over the last three years. Even looking at the last year, profit was still down 65%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 65% in the same period. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, if Sartorius Stedim Biotech'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 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.

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.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted Sartorius Stedim Biotech's net profit by €60m 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. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And that's as you'd expect, given these boosts are described as 'unusual'. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Sartorius Stedim Biotech's Profit Performance

In its last report Sartorius Stedim Biotech benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. 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 Sartorius Stedim Biotech's profits probably give an overly generous impression of its sustainable level of profitability. So while earnings quality is important, it's equally important to consider the risks facing Sartorius Stedim Biotech at this point in time. For example - Sartorius Stedim Biotech has 3 warning signs we think you should be aware of.

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 are plenty of other ways to inform your opinion of a company. 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 that insiders are buying.

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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.