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The market shrugged off Somnigroup International Inc.'s (NYSE:SGI) weak earnings report last week. We did some analysis and found some positive factors that investors might be paying attention to rather than profit.
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Somnigroup International expanded the number of shares on issue by 20% 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 Somnigroup International's historical EPS growth by clicking on this link.
How Is Dilution Impacting Somnigroup International's Earnings Per Share (EPS)?
Unfortunately, Somnigroup International's profit is down 56% per year over three years. And even focusing only on the last twelve months, we see profit is down 23%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 26% in the same period. So you can see that the dilution has had a bit of an impact on shareholders.
If Somnigroup International's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. 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 Somnigroup International's profit suffered from unusual items, which reduced profit by US$97m 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 that's hardly a surprise given these line items are considered unusual. If Somnigroup International doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.