Acuvi's (STO:ACUVI) Earnings Are Weaker Than They Seem

Despite announcing strong earnings, Acuvi AB's (STO:ACUVI) stock was sluggish. Our analysis uncovered some concerning factors that we believe the market might be paying attention to.

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One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Acuvi increased the number of shares on issue by 13% over the last twelve months by issuing new shares. That means its earnings are split among a greater number of shares. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. You can see a chart of Acuvi's EPS by clicking here.

How Is Dilution Impacting Acuvi's Earnings Per Share (EPS)?

Acuvi was losing money three years ago. And even focusing only on the last twelve months, we don't have a meaningful growth rate because it made a loss a year ago, too. What we do know is that while it's great to see a profit over the last twelve months, that profit would have been better, on a per share basis, if the company hadn't needed to issue shares. So you can see that the dilution has had a bit of an impact on shareholders.

If Acuvi's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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.

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

Our Take On Acuvi's Profit Performance

Over the last year Acuvi issued new shares and so, there's a noteworthy divergence between EPS and net income growth. Therefore, it seems possible to us that Acuvi's true underlying earnings power is actually less than its statutory profit. The good news is that it earned a profit in the last twelve months, despite its previous loss. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So while earnings quality is important, it's equally important to consider the risks facing Acuvi at this point in time. At Simply Wall St, we found 2 warning signs for Acuvi and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of Acuvi's profit. 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. 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 with significant insider holdings 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.