There May Be Reason For Hope In Gateley (Holdings)'s (LON:GTLY) Disappointing Earnings

Gateley (Holdings) Plc's (LON:GTLY) earnings announcement last week didn't impress shareholders. While the headline numbers were soft, we believe that investors might be missing some encouraging factors.

View our latest analysis for Gateley (Holdings)

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Gateley (Holdings) expanded the number of shares on issue by 5.1% 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 Gateley (Holdings)'s EPS by clicking here.

How Is Dilution Impacting Gateley (Holdings)'s Earnings Per Share (EPS)?

As you can see above, Gateley (Holdings) has been growing its net income over the last few years, with an annualized gain of 13% over three years. Net profit actually dropped by 37% in the last year. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 39%. Therefore, the dilution is having a noteworthy influence on shareholder returns.

If Gateley (Holdings)'s EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. 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.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that Gateley (Holdings)'s profit suffered from unusual items, which reduced profit by UK£8.2m 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 that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Gateley (Holdings) to produce a higher profit next year, all else being equal.

Our Take On Gateley (Holdings)'s Profit Performance

To sum it all up, Gateley (Holdings) 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. Considering all the aforementioned, we'd venture that Gateley (Holdings)'s profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. So while earnings quality is important, it's equally important to consider the risks facing Gateley (Holdings) at this point in time. Case in point: We've spotted 4 warning signs for Gateley (Holdings) you should be aware of.

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 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. 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.