Investors Shouldn't Be Too Comfortable With Europa Oil & Gas (Holdings)'s (LON:EOG) Robust Earnings

Last week's profit announcement from Europa Oil & Gas (Holdings) plc (LON:EOG) was underwhelming for investors, despite headline numbers being robust. We think that the market might be paying attention to some underlying factors are concerning.

Our analysis indicates that EOG is potentially undervalued!

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Europa Oil & Gas (Holdings) expanded the number of shares on issue by 69% over the last year. 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 Europa Oil & Gas (Holdings)'s historical EPS growth by clicking on this link.

A Look At The Impact Of Europa Oil & Gas (Holdings)'s Dilution On Its Earnings Per Share (EPS)

Europa Oil & Gas (Holdings) was losing money three years ago. 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 fairly significant impact on shareholders.

In the long term, if Europa Oil & Gas (Holdings)'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.

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 Europa Oil & Gas (Holdings)'s profit suffered from unusual items, which reduced profit by UK£570k 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. If Europa Oil & Gas (Holdings) doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Europa Oil & Gas (Holdings)'s Profit Performance

To sum it all up, Europa Oil & Gas (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. Based on these factors, we think it's very unlikely that Europa Oil & Gas (Holdings)'s statutory profits make it seem much weaker than it is. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For instance, we've identified 4 warning signs for Europa Oil & Gas (Holdings) (2 make us uncomfortable) you should be familiar with.

Our examination of Europa Oil & Gas (Holdings) has focussed on certain factors that can make its earnings look better than they are. 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. 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.