Solid Earnings May Not Tell The Whole Story For Wavestone (EPA:WAVE)

The market shrugged off Wavestone SA's (EPA:WAVE) solid earnings report. We did some digging and believe investors may be worried about some underlying factors in the report.

Check out our latest analysis for Wavestone

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Wavestone increased the number of shares on issue by 24% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. 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. Check out Wavestone's historical EPS growth by clicking on this link.

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

As you can see above, Wavestone has been growing its net income over the last few years, with an annualized gain of 60% over three years. But EPS was only up 34% per year, in the exact same period. And over the last 12 months, the company grew its profit by 13%. But earnings per share are actually down 5.3%, over the last twelve months. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

In the long term, if Wavestone'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.

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

On top of the dilution, we should also consider the €22m impact of unusual items in the last year, which had the effect of suppressing profit. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Wavestone to produce a higher profit next year, all else being equal.

Our Take On Wavestone's Profit Performance

Wavestone suffered from unusual items which depressed its profit in its last report; if that is not repeated then profit should be higher, all else being equal. But on the other hand, the company issued more shares, so without buying more shares each shareholder will end up with a smaller part of the profit. Having considered these factors, we don't think Wavestone's statutory profits give an overly harsh view of the business. If you'd like to know more about Wavestone as a business, it's important to be aware of any risks it's facing. In terms of investment risks, we've identified 1 warning sign with Wavestone, and understanding this 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, as a guide to a business. 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 with high insider ownership.

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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.