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A lackluster earnings announcement from AltaGas Ltd. (TSE:ALA) last week didn't sink the stock price. We think that investors are worried about some weaknesses underlying the earnings.
Check out our latest analysis for AltaGas
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. AltaGas expanded the number of shares on issue by 5.7% 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 AltaGas' EPS by clicking here.
How Is Dilution Impacting AltaGas' Earnings Per Share (EPS)?
AltaGas has improved its profit over the last three years, with an annualized gain of 12% in that time. Net profit actually dropped by 16% in the last year. But the EPS result was even worse, with the company recording a decline of 19%. And so, you can see quite clearly that dilution is influencing shareholder earnings.
If AltaGas' 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.
The Impact Of Unusual Items On Profit
Finally, we should also consider the fact that unusual items boosted AltaGas' net profit by CA$268m over the last year. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. 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. Which is hardly surprising, given the name. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).
Our Take On AltaGas' Profit Performance
To sum it all up, AltaGas got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. And furthermore, it went and issued plenty of new shares, ensuring that each shareholder (who did not tip more money in) now owns a smaller proportion of the company. For the reasons mentioned above, we think that a perfunctory glance at AltaGas' 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. To that end, you should learn about the 4 warning signs we've spotted with AltaGas (including 1 which is a bit unpleasant).