AFI Properties' (TLV:AFPR) Soft Earnings Are Actually Better Than They Appear

Shareholders appeared unconcerned with AFI Properties Ltd's (TLV:AFPR) lackluster earnings report last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

View our latest analysis for AFI Properties

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, AFI Properties increased the number of shares on issue by 8.0% 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 AFI Properties' historical EPS growth by clicking on this link.

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

Unfortunately, AFI Properties' profit is down 92% per year over three years. Even looking at the last year, profit was still down 95%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 96% in the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

If AFI Properties' 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 the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of AFI Properties.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that AFI Properties' profit suffered from unusual items, which reduced profit by ₪194m in the last twelve months. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. 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. In the twelve months to December 2020, AFI Properties had a big unusual items expense. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

Our Take On AFI Properties' Profit Performance

AFI Properties suffered from unusual items which depressed its profit in its last report; if that is not repeated then profit should be higher, all else being equal. 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 AFI Properties' profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Case in point: We've spotted 5 warning signs for AFI Properties you should be mindful of and 2 of these are significant.

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 are plenty of other ways to inform your opinion of a company. 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. 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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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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