Catena's (STO:CATE) Weak Earnings May Only Reveal A Part Of The Whole Picture

The subdued market reaction suggests that Catena AB (publ)'s (STO:CATE) recent earnings didn't contain any surprises. However, we believe that investors should be aware of some underlying factors which may be of concern.

We've discovered 3 warning signs about Catena. View them for free.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Catena issued 10.0% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. You can see a chart of Catena's EPS by clicking here.

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

Unfortunately, Catena's profit is down 51% per year over three years. Even looking at the last year, profit was still down 11%. Sadly, earnings per share fell further, down a full 23% in that time. And so, you can see quite clearly that dilution is influencing shareholder earnings.

If Catena'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.

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?

Finally, we should also consider the fact that unusual items boosted Catena's net profit by kr431m over the last year. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. 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 Catena's Profit Performance

In its last report Catena benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. And furthermore, it went and issued plenty of new shares, ensuring that each shareholder (who did not tip more money in) now owns a smaller proportion of the company. For the reasons mentioned above, we think that a perfunctory glance at Catena's statutory profits might make it look better than it really is on an underlying level. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example, we've found that Catena has 3 warning signs (2 are a bit concerning!) that deserve your attention before going any further with your analysis.

Our examination of Catena 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 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.