We Believe Energy Services of America's (NASDAQ:ESOA) Earnings Are A Poor Guide For Its Profitability

Even though Energy Services of America Corporation (NASDAQ:ESOA) posted strong earnings recently, the stock hasn't reacted in a large way. We think that investors might be worried about the foundations the earnings are built on.

See our latest analysis for Energy Services of America

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Energy Services of America expanded the number of shares on issue by 22% over the last year. As a result, its net income is now split between 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 Energy Services of America's historical EPS growth by clicking on this link.

A Look At The Impact Of Energy Services of America's Dilution on Its Earnings Per Share (EPS).

As you can see above, Energy Services of America has been growing its net income over the last few years, with an annualized gain of 361% over three years. But EPS was only up 337% per year, in the exact same period. And the 495% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 445% in that time. And so, you can see quite clearly that dilution is influencing shareholder earnings.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if Energy Services of America can grow EPS persistently. 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Energy Services of America.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted Energy Services of America's net profit by US$10m over the last year. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. We can see that Energy Services of America's positive unusual items were quite significant relative to its profit in the year to March 2022. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Energy Services of America's Profit Performance

To sum it all up, Energy Services of America got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. 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. Considering all this we'd argue Energy Services of America's profits probably give an overly generous impression of its sustainable level of profitability. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Every company has risks, and we've spotted 4 warning signs for Energy Services of America you should know about.

Our examination of Energy Services of America 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 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. 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.