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The market was pleased with the recent earnings report from Ansell Limited (ASX:ANN), despite the profit numbers being soft. Our analysis suggests that investors may have noticed some promising signs beyond the statutory profit figures.
View our latest analysis for Ansell
To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Ansell expanded the number of shares on issue by 15% over the last year. As a result, its net income is now split between a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of Ansell's EPS by clicking here.
How Is Dilution Impacting Ansell's Earnings Per Share (EPS)?
Unfortunately, Ansell's profit is down 69% per year over three years. And even focusing only on the last twelve months, we see profit is down 48%. Sadly, earnings per share fell further, down a full 49% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.
In the long term, if Ansell'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.
The Impact Of Unusual Items On Profit
Alongside that dilution, it's also important to note that Ansell's profit suffered from unusual items, which reduced profit by US$66m in the last twelve months. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. If Ansell 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 Ansell's Profit Performance
To sum it all up, Ansell 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. After taking into account all these factors, we think that Ansell's statutory results are a decent reflection of its underlying earnings power. 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. You'd be interested to know, that we found 3 warning signs for Ansell and you'll want to know about them.