BWG's (OB:BWLPG) Shareholders Have More To Worry About Than Only Soft Earnings

A lackluster earnings announcement from BW LPG Limited (OB:BWLPG) last week didn't sink the stock price. We think that investors are worried about some weaknesses underlying the earnings.

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To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. BWG expanded the number of shares on issue by 14% over the last year. Therefore, each share now receives a smaller portion of profit. 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. You can see a chart of BWG's EPS by clicking here.

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

BWG has improved its profit over the last three years, with an annualized gain of 18% in that time. Net income was down 55% over the last twelve months. But the EPS result was even worse, with the company recording a decline of 59%. Therefore, the dilution is having a noteworthy influence on shareholder returns.

If BWG's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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.

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 BWG's profit was boosted by unusual items worth US$31m 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. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And, after all, that's exactly what the accounting terminology implies. If BWG doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On BWG's Profit Performance

In its last report BWG benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. And furthermore, it went and issued plenty of new shares, ensuring that each shareholder (who did not tip more money in) now owns a smaller proportion of the company. Considering all this we'd argue BWG's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into BWG, you'd also look into what risks it is currently facing. For example, BWG has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

Our examination of BWG 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 is always more to discover if you are capable of focussing your mind on minutiae. 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.