Earnings Troubles May Signal Larger Issues for Ependion (STO:EPEN) Shareholders

Despite Ependion AB's (STO:EPEN) recent earnings report having lackluster headline numbers, the market responded positively. While shareholders may be willing to overlook soft profit numbers, we believe that they should also be taking into account some other factors which may be cause for concern.

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To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Ependion expanded the number of shares on issue by 11% over the last year. That means its earnings are split among a greater number of shares. 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. Check out Ependion's historical EPS growth by clicking on this link.

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

As you can see above, Ependion has been growing its net income over the last few years, with an annualized gain of 69% over three years. Net income was down 27% over the last twelve months. But the EPS result was even worse, with the company recording a decline of 28%. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, if Ependion's earnings per share can increase, then the share price should too. 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 Ependion's Profit Performance

Ependion issued shares during the year, and that means its EPS performance lags its net income growth. Therefore, it seems possible to us that Ependion's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 64% per annum growth in EPS for the last three. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. Ultimately, this article has formed an opinion based on historical data. However, it can also be great to think about what analysts are forecasting for the future. At Simply Wall St, we have analyst estimates which you can view by clicking here.

Today we've zoomed in on a single data point to better understand the nature of Ependion'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. 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.