We Think That There Are More Issues For Sappi (JSE:SAP) Than Just Sluggish Earnings

Sappi Limited's (JSE:SAP) stock showed strength, with investors undeterred by its weak earnings report. We think that shareholders might be missing some concerning factors that our analysis found.

See our latest analysis for Sappi

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, Sappi issued 7.3% more new shares 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 Sappi's EPS by clicking here.

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

As you can see above, Sappi has been growing its net income over the last few years, with an annualized gain of 75% over three years. Net income was down 87% over the last twelve months. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 88%. So you can see that the dilution has had a bit of an impact on shareholders.

If Sappi's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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.

Our Take On Sappi's Profit Performance

Over the last year Sappi issued new shares and so, there's a noteworthy divergence between EPS and net income growth. Because of this, we think that it may be that Sappi's statutory profits are better than its underlying earnings power. Nonetheless, it's still worth noting that its earnings per share have grown at 66% over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Be aware that Sappi is showing 4 warning signs in our investment analysis and 2 of those are significant...

This note has only looked at a single factor that sheds light on the nature of Sappi's profit. 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 with significant insider holdings to be useful.

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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.