SkyCity Entertainment Group's (NZSE:SKC) Earnings Are Growing But Is There More To The Story?

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether SkyCity Entertainment Group's (NZSE:SKC) statutory profits are a good guide to its underlying earnings.

While SkyCity Entertainment Group was able to generate revenue of NZ$644.6m in the last twelve months, we think its profit result of NZ$235.3m was more important. The chart below shows how profit has actually increased over the last three years, even while revenue has declined.

See our latest analysis for SkyCity Entertainment Group

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. In this article we'll look at how SkyCity Entertainment Group is impacting shareholders by issuing new shares, as well as how unusual items have affected the income line. 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.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. SkyCity Entertainment Group expanded the number of shares on issue by 15% 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 SkyCity Entertainment Group's historical EPS growth by clicking on this link.

A Look At The Impact Of SkyCity Entertainment Group's Dilution on Its Earnings Per Share (EPS).

As you can see above, SkyCity Entertainment Group has been growing its net income over the last few years, with an annualized gain of 424% over three years. And at a glance the 45% gain in profit over the last year impresses. But in comparison, EPS only increased by 47% over the same period. So you can see that the dilution has had a bit of an impact on shareholders. Therefore, the dilution is having a noteworthy influence on shareholder returns. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, earnings per share growth should beget share price growth. So SkyCity Entertainment Group shareholders will want to see that EPS figure continue to increase. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted SkyCity Entertainment Group's net profit by NZ$190m over the last year. 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 analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. SkyCity Entertainment Group had a rather significant contribution from unusual items relative to its profit to June 2020. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On SkyCity Entertainment Group's Profit Performance

In its last report SkyCity Entertainment Group 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 SkyCity Entertainment Group's statutory profits might make it look better than it really is on an underlying level. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. When we did our research, we found 3 warning signs for SkyCity Entertainment Group (1 doesn't sit too well with us!) that we believe deserve your full attention.

Our examination of SkyCity Entertainment Group 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. 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.

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This article by Simply Wall St is general in nature. 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.
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