Keywords Studios (LON:KWS) Is Growing Earnings But Are They A Good Guide?

By
Simply Wall St
Published
February 11, 2021
AIM:KWS
Source: Shutterstock

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. Today we'll focus on whether this year's statutory profits are a good guide to understanding Keywords Studios (LON:KWS).

We like the fact that Keywords Studios made a profit of €13.3m on its revenue of €346.8m, in the last year. One positive is that it has grown both its profit and its revenue, over the last few years.

View our latest analysis for Keywords Studios

earnings-and-revenue-history
AIM:KWS Earnings and Revenue History February 11th 2021

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 Keywords Studios 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. Keywords Studios expanded the number of shares on issue by 14% over the last year. 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 Keywords Studios' historical EPS growth by clicking on this link.

A Look At The Impact Of Keywords Studios' Dilution on Its Earnings Per Share (EPS).

Keywords Studios has improved its profit over the last three years, with an annualized gain of 58% in that time. In comparison, earnings per share only gained 36% over the same period. And the 30% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 26% 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, earnings per share growth should beget share price growth. So Keywords Studios shareholders will want to see that EPS figure continue to increase. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. 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 Keywords Studios' Profit Performance

Keywords Studios shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Because of this, we think that it may be that Keywords Studios' statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 36% per annum growth in EPS for the last three. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Every company has risks, and we've spotted 1 warning sign for Keywords Studios you should know about.

This note has only looked at a single factor that sheds light on the nature of Keywords Studios' 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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Simply Wall St is focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of data scientists and multiple equity analysts with over two decades worth of financial markets experience between them.