We Think That There Are Issues Underlying Nexen's (KRX:005720) Earnings

Despite posting some strong earnings, the market for Nexen Corporation's (KRX:005720) stock hasn't moved much. Our analysis suggests that shareholders have noticed something concerning in the numbers.

View our latest analysis for Nexen

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Nexen issued 90% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. 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 Nexen's historical EPS growth by clicking on this link.

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

As you can see above, Nexen has been growing its net income over the last few years, with an annualized gain of 283% over three years. And at a glance the 138% gain in profit over the last year impresses. But in comparison, EPS only increased by 145% over the same period. So you can see that the dilution has had a fairly significant impact on shareholders.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if Nexen 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 Nexen.

Our Take On Nexen's Profit Performance

Nexen shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. As a result, we think it may well be the case that Nexen's underlying earnings power is lower 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. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing Nexen at this point in time. To that end, you should learn about the 4 warning signs we've spotted with Nexen (including 3 which shouldn't be ignored).

This note has only looked at a single factor that sheds light on the nature of Nexen's profit. 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. 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.