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National Grid plc's (LON:NG.) recent weak earnings report didn't cause a big stock movement. We think that investors are worried about some weaknesses underlying the earnings.
View our latest analysis for National Grid
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, National Grid increased the number of shares on issue by 32% over the last twelve months by issuing new shares. 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 National Grid's EPS by clicking here.
A Look At The Impact Of National Grid's Dilution On Its Earnings Per Share (EPS)
National Grid has improved its profit over the last three years, with an annualized gain of 45% in that time. In comparison, earnings per share only gained 25% over the same period. Net income was down 33% over the last twelve months. But the EPS result was even worse, with the company recording a decline of 40%. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.
In the long term, if National Grid'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 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.
How Do Unusual Items Influence Profit?
On top of the dilution, we should also consider the UK£1.0b impact of unusual items in the last year, which had the effect of suppressing profit. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. 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 National Grid 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 National Grid's Profit Performance
National Grid suffered from unusual items which depressed its profit in its last report; if that is not repeated then profit should be higher, all else being equal. But on the other hand, the company issued more shares, so without buying more shares each shareholder will end up with a smaller part of the profit. Having considered these factors, we don't think National Grid's statutory profits give an overly harsh view of the business. So while earnings quality is important, it's equally important to consider the risks facing National Grid at this point in time. When we did our research, we found 5 warning signs for National Grid (2 make us uncomfortable!) that we believe deserve your full attention.