Here's Why We Don't Think OPC Energy's (TLV:OPCE) Statutory Earnings Reflect Its Underlying Earnings Potential

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. 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 OPC Energy's (TLV:OPCE) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months OPC Energy made a profit of ₪33.5m on revenue of ₪1.29b. The chart below shows that revenue has been flat over the last three years, while profit has actually declined.

View our latest analysis for OPC Energy

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. Therefore, today we will consider the nature of OPC Energy'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 OPC Energy.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, OPC Energy increased the number of shares on issue by 25% 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 OPC Energy's historical EPS growth by clicking on this link.

A Look At The Impact Of OPC Energy's Dilution on Its Earnings Per Share (EPS).

OPC Energy's net profit dropped by 30% per year over the last three years. And even focusing only on the last twelve months, we see profit is down 56%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 58% in the same period. So you can see that the dilution has had a fairly significant impact on shareholders.

In the long term, if OPC Energy's earnings per share can increase, then the share price should too. 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.

How Do Unusual Items Influence Profit?

Finally, we should also consider the fact that unusual items boosted OPC Energy's net profit by ₪16m over the last year. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On OPC Energy's Profit Performance

To sum it all up, OPC Energy got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. 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 OPC Energy's profits probably give an overly generous impression of its sustainable level of profitability. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. To help with this, we've discovered 5 warning signs (2 can't be ignored!) that you ought to be aware of before buying any shares in OPC Energy.

Our examination of OPC Energy has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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.

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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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