Are EDP - Energias de Portugal's (ELI:EDP) Statutory Earnings A Good Reflection Of Its Earnings Potential?

Statistically speaking, it is less risky to invest in profitable companies than in 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. In this article, we'll look at how useful this year's statutory profit is, when analysing EDP - Energias de Portugal (ELI:EDP).

While EDP - Energias de Portugal was able to generate revenue of €12.9b in the last twelve months, we think its profit result of €473.7m was more important. The chart below shows that both revenue and profit have declined over the last three years.

See our latest analysis for EDP - Energias de Portugal

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 EDP - Energias de Portugal 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, EDP - Energias de Portugal issued 8.5% more new shares over the last year. 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. You can see a chart of EDP - Energias de Portugal's EPS by clicking here.

A Look At The Impact Of EDP - Energias de Portugal's Dilution on Its Earnings Per Share (EPS).

EDP - Energias de Portugal's net profit dropped by 68% per year over the last three years. And even focusing only on the last twelve months, we see profit is down 30%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 31% 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 EDP - Energias de Portugal's 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 €249m 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. Assuming those unusual expenses don't come up again, we'd therefore expect EDP - Energias de Portugal to produce a higher profit next year, all else being equal.

Our Take On EDP - Energias de Portugal's Profit Performance

EDP - Energias de Portugal suffered from unusual items which depressed its profit in its last report; if that is not repeated then profit should be higher, all else being equal. But unfortunately the dilution means that shareholders now own a smaller proportion of the company (assuming they maintained the same number of shares). That will weigh on earnings per share, even if it is not reflected in net income. Given the contrasting considerations, we don't have a strong view as to whether EDP - Energias de Portugal's profits are an apt reflection of its underlying potential for profit. If you'd like to know more about EDP - Energias de Portugal as a business, it's important to be aware of any risks it's facing. For example, EDP - Energias de Portugal has 4 warning signs (and 1 which is a bit concerning) we think you should know about.

Our examination of EDP - Energias de Portugal has focussed on certain factors that can make its earnings look better than they are. 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. 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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