Kaldalón hf's (ICE:KALD) Robust Earnings Might Be Weaker Than You Think

Kaldalón hf. (ICE:KALD) posted some decent earnings, but shareholders didn't react strongly. Our analysis has found some concerning factors which weaken the profit's foundation.

See our latest analysis for Kaldalón hf

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Kaldalón hf expanded the number of shares on issue by 52% over the last year. Therefore, each share now receives a smaller portion of profit. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. Check out Kaldalón hf's historical EPS growth by clicking on this link.

How Is Dilution Impacting Kaldalón hf's Earnings Per Share? (EPS)

Kaldalón hf has improved its profit over the last three years, with an annualized gain of 196% in that time. But EPS was only up 54% per year, in the exact same period. And the 210% profit boost in the last year certainly seems impressive at first glance. But in comparison, EPS only increased by 42% over the same period. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Kaldalón hf can grow EPS persistently. 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 Kaldalón hf.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that Kaldalón hf's profit was boosted by unusual items worth Kr1.8b in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that Kaldalón hf's positive unusual items were quite significant relative to its profit in the year to December 2021. 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 Kaldalón hf's Profit Performance

In its last report Kaldalón hf benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. On top of that, the dilution means that its earnings per share performance is worse than its profit performance. For all the reasons mentioned above, we think that, at a glance, Kaldalón hf's statutory profits could be considered to be low quality, because they are likely to give investors an overly positive impression of the company. If you want to do dive deeper into Kaldalón hf, you'd also look into what risks it is currently facing. Case in point: We've spotted 5 warning signs for Kaldalón hf you should be mindful of and 2 of them are concerning.

Our examination of Kaldalón hf 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. Some people consider a high return on equity to be a good sign of a quality business. 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.