EDP - Energias de Portugal's (ELI:EDP) Profits May Not Reveal Underlying Issues

The stock price didn't jump after EDP - Energias de Portugal, S.A. (ELI:EDP) posted decent earnings last week. We did some digging and believe investors may be worried about some underlying factors in the report.

See our latest analysis for EDP - Energias de Portugal

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, EDP - Energias de Portugal increased the number of shares on issue by 5.4% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. 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.

How Is Dilution Impacting EDP - Energias de Portugal's Earnings Per Share (EPS)?

As you can see above, EDP - Energias de Portugal has been growing its net income over the last few years, with an annualized gain of 19% over three years. But EPS was only up 8.4% per year, in the exact same period. And the 40% profit boost in the last year certainly seems impressive at first glance. But in comparison, EPS only increased by 34% 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 EDP - Energias de Portugal 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 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.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that EDP - Energias de Portugal's profit was boosted by unusual items worth €195m in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

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

In its last report EDP - Energias de Portugal benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. On top of that, the dilution means that its earnings per share performance is worse than its profit performance. Considering all this we'd argue EDP - Energias de Portugal's profits probably give an overly generous impression of its sustainable level of profitability. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. To that end, you should learn about the 3 warning signs we've spotted with EDP - Energias de Portugal (including 1 which is concerning).

Our examination of EDP - Energias de Portugal 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 is always more to discover if you are capable of focussing your mind on minutiae. 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. 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.