Globant S.A.'s (NYSE:GLOB) recent earnings report didn't offer any surprises, with the shares unchanged over the last week. Our analysis suggests that shareholders might be missing some positive underlying factors in the earnings report.
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, Globant issued 7.4% more new shares 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 Globant's historical EPS growth by clicking on this link.
How Is Dilution Impacting Globant's Earnings Per Share? (EPS)
As you can see above, Globant has been growing its net income over the last few years, with an annualized gain of 77% over three years. In comparison, earnings per share only gained 61% over the same period. However, net income was pretty flat over the last year with a miniscule increase. Meanwhile, EPS was actually down a full 4.7% over the period, highlighting just how different the profits look from a per-share perspective. And so, you can see quite clearly that dilution is influencing shareholder earnings.
In the long term, if Globant'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.
How Do Unusual Items Influence Profit?
Alongside that dilution, it's also important to note that Globant's profit suffered from unusual items, which reduced profit by US$18m in the last twelve months. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. If Globant doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.
Our Take On Globant's Profit Performance
To sum it all up, Globant took a hit from unusual items which pushed its profit down; without that, it would have made more money. But unfortunately the dilution means that shareholders now own a smaller proportion of the company (assuming they maintained the same number of shares). That will weigh on earnings per share, even if it is not reflected in net income. Based on these factors, it's hard to tell if Globant's profits are a reasonable reflection of its underlying profitability. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. In terms of investment risks, we've identified 1 warning sign with Globant, and understanding this should be part of your investment process.
In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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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