Extendicare Inc.'s (TSE:EXE) robust earnings report didn't manage to move the market for its stock. Our analysis suggests that shareholders have noticed something concerning in the numbers.
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Extendicare increased the number of shares on issue by 13% over the last twelve months by issuing new shares. 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 Extendicare's EPS by clicking here.
A Look At The Impact Of Extendicare's Dilution On Its Earnings Per Share (EPS)
Extendicare has improved its profit over the last three years, with an annualized gain of 644% in that time. But EPS was only up 580% per year, in the exact same period. And the 44% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 30% 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 it will certainly be a positive for shareholders if Extendicare 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.
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 Extendicare's Profit Performance
Extendicare shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Because of this, we think that it may be that Extendicare's statutory profits are better than its underlying earnings power. But the good news is that its EPS growth over the last three years has been very impressive. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. 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. Case in point: We've spotted 1 warning sign for Extendicare you should be aware of.
Today we've zoomed in on a single data point to better understand the nature of Extendicare's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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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