Aurora Eiendom's (OB:AURA) Earnings Quality Is Low

The market shrugged off Aurora Eiendom AS' (OB:AURA) weak earnings report. Despite the market responding positively, we think that there are several concerning factors that investors should be aware of.

Check out our latest analysis for Aurora Eiendom

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Aurora Eiendom increased the number of shares on issue by 51% over the last twelve months by issuing new shares. That means its earnings are split among a greater number of shares. 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. Check out Aurora Eiendom's historical EPS growth by clicking on this link.

How Is Dilution Impacting Aurora Eiendom's Earnings Per Share (EPS)?

As it happens, we don't know how much the company made or lost three years ago, because we don't have the data. And even focusing only on the last twelve months, we see profit is down 44%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 77% in the same period. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

In the long term, if Aurora Eiendom's earnings per share can increase, then the share price should too. 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.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that Aurora Eiendom's profit was boosted by unusual items worth kr106m 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. 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 Aurora Eiendom 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 Aurora Eiendom's Profit Performance

In its last report Aurora Eiendom 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. For the reasons mentioned above, we think that a perfunctory glance at Aurora Eiendom's statutory profits might make it look better than it really is on an underlying level. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Be aware that Aurora Eiendom is showing 7 warning signs in our investment analysis and 3 of those make us uncomfortable...

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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 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.