Last week's profit announcement from Skipper Limited (NSE:SKIPPERPP) was underwhelming for investors, despite headline numbers being robust. Our analysis uncovered some concerning factors that we believe the market might be paying attention to.
View our latest analysis for Skipper
To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, Skipper increased the number of shares on issue by 10.0% over the last twelve months by issuing new shares. 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 Skipper's historical EPS growth by clicking on this link.
How Is Dilution Impacting Skipper's Earnings Per Share (EPS)?
Skipper has improved its profit over the last three years, with an annualized gain of 281% in that time. In comparison, earnings per share only gained 267% over the same period. And the 130% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 121% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.
Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Skipper 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.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Skipper.
Our Take On Skipper's Profit Performance
Skipper shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Therefore, it seems possible to us that Skipper's true underlying earnings power is actually less than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you'd like to know more about Skipper as a business, it's important to be aware of any risks it's facing. When we did our research, we found 3 warning signs for Skipper (1 doesn't sit too well with us!) that we believe deserve your full attention.
This note has only looked at a single factor that sheds light on the nature of Skipper's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.