Earnings Troubles May Signal Larger Issues for KMC Properties (OB:KMCP) Shareholders

The market rallied behind KMC Properties ASA's (OB:KMCP) stock, leading do a rise in the share price after its recent weak earnings report. We think that shareholders might be missing some concerning factors that our analysis found.

Check out our latest analysis for KMC Properties

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, KMC Properties increased the number of shares on issue by 21% over the last twelve months by issuing new shares. That means its earnings are split among 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 KMC Properties' historical EPS growth by clicking on this link.

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

KMC Properties' net profit dropped by 94% per year over the last three years. Even looking at the last year, profit was still down 81%. Sadly, earnings per share fell further, down a full 84% in that time. And so, you can see quite clearly that dilution is influencing shareholder earnings.

If KMC Properties' EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. 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.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that KMC Properties' profit was boosted by unusual items worth kr48m in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. If KMC Properties 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 KMC Properties' Profit Performance

To sum it all up, KMC Properties got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. 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 KMC Properties' profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into KMC Properties, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 6 warning signs for KMC Properties (of which 2 are potentially serious!) you should know about.

Our examination of KMC Properties 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. 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 with significant insider holdings 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.

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