Muza's (WSE:MZA) Promising Earnings May Rest On Soft Foundations

Despite posting some strong earnings, the market for Muza S.A.'s (WSE:MZA) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

View our latest analysis for Muza

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Muza increased the number of shares on issue by 6.5% 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 Muza's historical EPS growth by clicking on this link.

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

As you can see above, Muza has been growing its net income over the last few years, with an annualized gain of 390% over three years. But EPS was only up 347% per year, in the exact same period. And the 261% profit boost in the last year certainly seems impressive at first glance. But in comparison, EPS only increased by 277% over the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Muza can grow EPS persistently. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Muza.

Our Take On Muza's Profit Performance

Muza shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Because of this, we think that it may be that Muza's statutory profits are better than its underlying earnings power. But the good news is that its EPS growth over the last three years has been very impressive. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about Muza as a business, it's important to be aware of any risks it's facing. In terms of investment risks, we've identified 2 warning signs with Muza, and understanding these should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Muza's profit. 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 that insiders are buying.

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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.