Some Investors May Be Willing To Look Past Sabaf's (BIT:SAB) Soft Earnings

The market was pleased with the recent earnings report from Sabaf S.p.A. (BIT:SAB), despite the profit numbers being soft. Our analysis suggests that investors may have noticed some promising signs beyond the statutory profit figures.

See our latest analysis for Sabaf

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Sabaf issued 11% more new shares over the last year. As a result, its net income is now split between a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out Sabaf's historical EPS growth by clicking on this link.

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

Sabaf's net profit dropped by 78% per year over the last three years. Even looking at the last year, profit was still down 80%. Sadly, earnings per share fell further, down a full 82% in that time. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, if Sabaf'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.

How Do Unusual Items Influence Profit?

On top of the dilution, we should also consider the €3.8m impact of unusual items in the last year, which had the effect of suppressing profit. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Sabaf to produce a higher profit next year, all else being equal.

Our Take On Sabaf's Profit Performance

To sum it all up, Sabaf took a hit from unusual items which pushed its profit down; without that, it would have made more money. But unfortunately the dilution means that shareholders now own a smaller proportion of the company (assuming they maintained the same number of shares). That will weigh on earnings per share, even if it is not reflected in net income. Based on these factors, we think that Sabaf's profits are a reasonably conservative guide to its underlying profitability. If you'd like to know more about Sabaf as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 6 warning signs for Sabaf (of which 1 can't be ignored!) you should know about.

Our examination of Sabaf has focussed on certain factors that can make its earnings look better than they are. 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. 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.

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

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.