Smurfit Westrock's (NYSE:SW) Weak Earnings May Only Reveal A Part Of The Whole Picture

The subdued market reaction suggests that Smurfit Westrock Plc's (NYSE:SW) recent earnings didn't contain any surprises. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

View our latest analysis for Smurfit Westrock

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Smurfit Westrock expanded the number of shares on issue by 100% 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. You can see a chart of Smurfit Westrock's EPS by clicking here.

A Look At The Impact Of Smurfit Westrock's Dilution On Its Earnings Per Share (EPS)

Unfortunately, Smurfit Westrock's profit is down 60% per year over three years. And even focusing only on the last twelve months, we see profit is down 61%. Sadly, earnings per share fell further, down a full 74% in that time. So you can see that the dilution has had a fairly significant impact on shareholders.

In the long term, if Smurfit Westrock'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 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.

The Impact Of Unusual Items On Profit

On top of the dilution, we should also consider the US$395m 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. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Smurfit Westrock to produce a higher profit next year, all else being equal.

Our Take On Smurfit Westrock's Profit Performance

Smurfit Westrock 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 Smurfit Westrock'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 Smurfit Westrock at this point in time. Our analysis shows 6 warning signs for Smurfit Westrock (2 don't sit too well with us!) and we strongly recommend you look at these bad boys before investing.

Our examination of Smurfit Westrock has focussed on certain factors that can make its earnings look better than they are. But there are plenty of other ways to inform your opinion of a company. 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 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.