Swedish Orphan Biovitrum's (STO:SOBI) Weak Earnings May Only Reveal A Part Of The Whole Picture

Swedish Orphan Biovitrum AB (publ)'s (STO:SOBI) earnings announcement last week contained some soft numbers, disappointing investors. Our analysis suggests that while the headline numbers were soft, there are some positive factors which shareholders may have missed.

Check out our latest analysis for Swedish Orphan Biovitrum

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Swedish Orphan Biovitrum expanded the number of shares on issue by 15% 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. Check out Swedish Orphan Biovitrum's historical EPS growth by clicking on this link.

A Look At The Impact Of Swedish Orphan Biovitrum's Dilution On Its Earnings Per Share (EPS)

Swedish Orphan Biovitrum's net profit dropped by 26% per year over the last three years. Even looking at the last year, profit was still down 8.7%. Sadly, earnings per share fell further, down a full 16% in that time. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, if Swedish Orphan Biovitrum'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 the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

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?

On top of the dilution, we should also consider the kr453m impact of unusual items in the last year, which had the effect of suppressing profit. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. 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 Swedish Orphan Biovitrum to produce a higher profit next year, all else being equal.

Our Take On Swedish Orphan Biovitrum's Profit Performance

Swedish Orphan Biovitrum 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. Based on these factors, we think it's very unlikely that Swedish Orphan Biovitrum'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 Swedish Orphan Biovitrum at this point in time. In terms of investment risks, we've identified 2 warning signs with Swedish Orphan Biovitrum, and understanding these should be part of your investment process.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 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.