Embellence Group's (STO:EMBELL) Earnings Are Of Questionable Quality

Embellence Group AB (publ)'s (STO:EMBELL) robust earnings report didn't manage to move the market for its stock. We did some digging, and we found some concerning factors in the details.

See our latest analysis for Embellence Group

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, Embellence Group issued 5.5% more new shares over the last year. As a result, its net income is now split between 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 Embellence Group's EPS by clicking here.

A Look At The Impact Of Embellence Group's Dilution on Its Earnings Per Share (EPS).

As you can see above, Embellence Group has been growing its net income over the last few years, with an annualized gain of 39% over three years. And the 24% profit boost in the last year certainly seems impressive at first glance. But in comparison, EPS only increased by 24% over the same period. So you can see that the dilution has had a bit of an impact on shareholders.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Embellence Group 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.

Our Take On Embellence Group's Profit Performance

Embellence Group 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 Embellence Group's statutory profits are better than its underlying earnings power. Nonetheless, it's still worth noting that its earnings per share have grown at 39% over the last three years. 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. If you'd like to know more about Embellence Group as a business, it's important to be aware of any risks it's facing. While conducting our analysis, we found that Embellence Group has 4 warning signs and it would be unwise to ignore them.

This note has only looked at a single factor that sheds light on the nature of Embellence Group's profit. 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. 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.