We're Not So Sure You Should Rely on Israel Canada (T.R)'s (TLV:ISCN) Statutory Earnings

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. 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. This article will consider whether Israel Canada (T.R)'s (TLV:ISCN) statutory profits are a good guide to its underlying earnings.

While Israel Canada (T.R) was able to generate revenue of ₪199.0m in the last twelve months, we think its profit result of ₪74.4m was more important. In the chart below, you can see that its profit and revenue have both grown over the last three years, although its revenue has slipped in the last twelve months.

View our latest analysis for Israel Canada (T.R)

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. Therefore, today we will consider the nature of Israel Canada (T.R)'s statutory earnings with reference to its dilution of shareholders and the impact of unusual items. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Israel Canada (T.R).

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Israel Canada (T.R) expanded the number of shares on issue by 10% over the last year. That means its earnings are split among a greater number of shares. 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 Israel Canada (T.R)'s historical EPS growth by clicking on this link.

How Is Dilution Impacting Israel Canada (T.R)'s Earnings Per Share? (EPS)

As you can see above, Israel Canada (T.R) has been growing its net income over the last few years, with an annualized gain of 235% over three years. But EPS was only up 162% per year, in the exact same period. While we did see a very small decrease, net profit was basically flat over the last year. In contrast, earnings per share are actually down a full 8.9%, over the last twelve months. 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 Israel Canada (T.R)'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 the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted Israel Canada (T.R)'s net profit by ₪20m over the last year. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. We can see that Israel Canada (T.R)'s positive unusual items were quite significant relative to its profit in the year to September 2020. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Israel Canada (T.R)'s Profit Performance

In its last report Israel Canada (T.R) benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. And furthermore, it went and issued plenty of new shares, ensuring that each shareholder (who did not tip more money in) now owns a smaller proportion of the company. Considering all this we'd argue Israel Canada (T.R)'s profits probably give an overly generous impression of its sustainable level of profitability. 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. To help with this, we've discovered 3 warning signs (1 is a bit concerning!) that you ought to be aware of before buying any shares in Israel Canada (T.R).

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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. 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.

When trading Israel Canada (T.R) or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.