Does Acroud's (STO:ACROUD) Statutory Profit Adequately Reflect Its Underlying Profit?

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 Acroud (STO:ACROUD).

It's good to see that over the last twelve months Acroud made a profit of €2.55m on revenue of €12.4m. Even though revenue is down over the last three years, you can see in the chart below that the company has moved from loss-making to profitable.

See our latest analysis for Acroud

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. In this article we'll look at how Acroud is impacting shareholders by issuing new shares, as well as how unusual items have affected the income line. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Acroud.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Acroud increased the number of shares on issue by 51% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. 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. Check out Acroud's historical EPS growth by clicking on this link.

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

Acroud was losing money three years ago. And even focusing only on the last twelve months, we see profit is down 56%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 56% in the same period. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

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

Alongside that dilution, it's also important to note that Acroud's profit suffered from unusual items, which reduced profit by €1.1m in the last twelve months. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Acroud to produce a higher profit next year, all else being equal.

Our Take On Acroud's Profit Performance

Acroud 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 on the other hand, the company issued more shares, so without buying more shares each shareholder will end up with a smaller part of the profit. Based on these factors, we think it's very unlikely that Acroud's statutory profits make it seem much weaker than it is. So while earnings quality is important, it's equally important to consider the risks facing Acroud at this point in time. Be aware that Acroud is showing 5 warning signs in our investment analysis and 1 of those makes us a bit uncomfortable...

Our examination of Acroud has focussed on certain factors that can make its earnings look better than they are. 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. 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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