Stock Analysis

Are Franchise Brands's (LON:FRAN) Statutory Earnings A Good Reflection Of Its Earnings Potential?

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AIM:FRAN
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Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. 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 Franchise Brands (LON:FRAN).

It's good to see that over the last twelve months Franchise Brands made a profit of UK£1.85m on revenue of UK£48.1m. The good news is that the company managed to grow its revenue over the last three years, and also move from loss-making to profitable.

See our latest analysis for Franchise Brands

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AIM:FRAN Earnings and Revenue History December 4th 2020

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'll look at how Franchise Brands is impacting shareholders by issuing new shares. 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. In fact, Franchise Brands increased the number of shares on issue by 20% over the last twelve months by issuing new shares. That means its earnings are split among 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. Check out Franchise Brands' historical EPS growth by clicking on this link.

How Is Dilution Impacting Franchise Brands' Earnings Per Share? (EPS)

Three years ago, Franchise Brands lost money. Even looking at the last year, profit was still down 29%. Sadly, earnings per share fell further, down a full 32% in that time. So you can see that the dilution has had a bit of an impact on shareholders. Therefore, the dilution is having a noteworthy influence on shareholder returns. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, if Franchise Brands' 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 Franchise Brands' Profit Performance

Franchise Brands issued shares during the year, and that means its EPS performance lags its net income growth. Therefore, it seems possible to us that Franchise Brands' true underlying earnings power is actually less than its statutory profit. In further bad news, its earnings per share decreased in the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing Franchise Brands at this point in time. You'd be interested to know, that we found 2 warning signs for Franchise Brands and you'll want to know about these.

This note has only looked at a single factor that sheds light on the nature of Franchise Brands' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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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