Stock Analysis

Are AFT Pharmaceuticals's (NZSE:AFT) Statutory Earnings A Good Reflection Of Its Earnings Potential?

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NZSE:AFT
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Broadly speaking, profitable businesses are less risky than unprofitable ones. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. Today we'll focus on whether this year's statutory profits are a good guide to understanding AFT Pharmaceuticals (NZSE:AFT).

We like the fact that AFT Pharmaceuticals made a profit of NZ$2.98m on its revenue of NZ$107.5m, in the last year. The good news is that the company managed to grow its revenue over the last three years, and also move from loss-making to profitable.

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NZSE:AFT Earnings and Revenue History January 23rd 2021

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 AFT Pharmaceuticals 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. As it happens, AFT Pharmaceuticals issued 7.5% more new shares 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. You can see a chart of AFT Pharmaceuticals' EPS by clicking here.

A Look At The Impact Of AFT Pharmaceuticals' Dilution on Its Earnings Per Share (EPS).

AFT Pharmaceuticals was losing money three years ago. Even looking at the last year, profit was still down 72%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 76% in 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, if AFT Pharmaceuticals' earnings per share can increase, then the share price should too. 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.

How Do Unusual Items Influence Profit?

On top of the dilution, we should also consider the NZ$1.7m impact of unusual items in the last year, which had the effect of suppressing profit. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. If AFT Pharmaceuticals doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On AFT Pharmaceuticals' Profit Performance

To sum it all up, AFT Pharmaceuticals took a hit from unusual items which pushed its profit down; without that, it would have made more money. But on the other hand, the company issued more shares, so without buying more shares each shareholder will end up with a smaller part of the profit. Given the contrasting considerations, we don't have a strong view as to whether AFT Pharmaceuticals's profits are an apt reflection of its underlying potential for profit. If you want to do dive deeper into AFT Pharmaceuticals, you'd also look into what risks it is currently facing. Our analysis shows 4 warning signs for AFT Pharmaceuticals (1 is concerning!) and we strongly recommend you look at them before investing.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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. 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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