Should You Use Anglo American's (LON:AAL) Statutory Earnings To Analyse It?

By
Simply Wall St
Published
February 06, 2021
LSE:AAL

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. That said, the current statutory profit is not always a good guide to a company's underlying profitability. Today we'll focus on whether this year's statutory profits are a good guide to understanding Anglo American (LON:AAL).

It's good to see that over the last twelve months Anglo American made a profit of US$2.14b on revenue of US$27.6b. As you can see in the chart below, its profit has declined over the last three years, even though its revenue has increased.

View our latest analysis for Anglo American

earnings-and-revenue-history
LSE:AAL Earnings and Revenue History February 6th 2021

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. In this article we will consider how Anglo American's decision to issue new shares in the company has impacted returns to shareholders. 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.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Anglo American increased the number of shares on issue by 10% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. 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. Check out Anglo American's historical EPS growth by clicking on this link.

How Is Dilution Impacting Anglo American's Earnings Per Share? (EPS)

Unfortunately, Anglo American's profit is down 44% per year over three years. And even focusing only on the last twelve months, we see profit is down 48%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 47% in the same period. 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.

If Anglo American'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.

Our Take On Anglo American's Profit Performance

Over the last year Anglo American issued new shares and so, there's a noteworthy divergence between EPS and net income growth. Therefore, it seems possible to us that Anglo American's true underlying earnings power is actually less than its statutory profit. In further bad news, its earnings per share decreased in the last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. While conducting our analysis, we found that Anglo American has 5 warning signs and it would be unwise to ignore them.

Today we've zoomed in on a single data point to better understand the nature of Anglo American's profit. 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. 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.
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