Some May Be Optimistic About Prysmian's (BIT:PRY) Earnings

Shareholders appeared unconcerned with Prysmian S.p.A.'s (BIT:PRY) lackluster earnings report last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

View our latest analysis for Prysmian

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Prysmian issued 6.0% more new shares 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 Prysmian's historical EPS growth by clicking on this link.

A Look At The Impact Of Prysmian's Dilution On Its Earnings Per Share (EPS)

As you can see above, Prysmian has been growing its net income over the last few years, with an annualized gain of 96% over three years. But EPS was only up 84% per year, in the exact same period. Net income was down 12% over the last twelve months. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 15%. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, if Prysmian's earnings per share can increase, then the share price should too. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that Prysmian's profit suffered from unusual items, which reduced profit by €259m in the last twelve months. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. 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. Assuming those unusual expenses don't come up again, we'd therefore expect Prysmian to produce a higher profit next year, all else being equal.

Our Take On Prysmian's Profit Performance

Prysmian 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 on the other hand, the company issued more shares, so without buying more shares each shareholder will end up with a smaller part of the profit. After taking into account all these factors, we think that Prysmian's statutory results are a decent reflection of its underlying earnings power. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. You'd be interested to know, that we found 3 warning signs for Prysmian and you'll want to know about these.

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. 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 with high insider ownership.

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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.