Why Paramount Global's (NASDAQ:PARA) Earnings Are Weaker Than They Seem

By
Simply Wall St
Published
February 22, 2022
NasdaqGS:PARA
Source: Shutterstock

We didn't see Paramount Global's (NASDAQ:PARA) stock surge when it reported robust earnings recently. We looked deeper into the numbers and found that shareholders might be concerned with some underlying weaknesses.

View our latest analysis for Paramount Global

earnings-and-revenue-history
NasdaqGS:PARA Earnings and Revenue History February 22nd 2022

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, Paramount Global issued 5.1% more new shares over the last year. As a result, its net income is now split between a greater number of shares. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. You can see a chart of Paramount Global's EPS by clicking here.

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

Paramount Global has improved its profit over the last three years, with an annualized gain of 30% in that time. And at a glance the 88% gain in profit over the last year impresses. On the other hand, earnings per share are only up 81% in that time. So you can see that the dilution has had a bit of an impact on shareholders.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Paramount Global shareholders will want to see that EPS figure continue to increase. 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

Finally, we should also consider the fact that unusual items boosted Paramount Global's net profit by US$2.2b 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 crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And, after all, that's exactly what the accounting terminology implies. We can see that Paramount Global's positive unusual items were quite significant relative to its profit in the year to December 2021. 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 Paramount Global's Profit Performance

In its last report Paramount Global benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. On top of that, the dilution means that its earnings per share performance is worse than its profit performance. For the reasons mentioned above, we think that a perfunctory glance at Paramount Global'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. Be aware that Paramount Global is showing 5 warning signs in our investment analysis and 2 of those are significant...

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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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