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Smurfit Westrock Plc's (NYSE:SW) recent weak earnings report didn't cause a big stock movement. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.
View our latest analysis for Smurfit Westrock
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Smurfit Westrock increased the number of shares on issue by 100% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. 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. You can see a chart of Smurfit Westrock's EPS by clicking here.
How Is Dilution Impacting Smurfit Westrock's Earnings Per Share (EPS)?
Smurfit Westrock's net profit dropped by 60% per year over the last three years. Even looking at the last year, profit was still down 61%. Sadly, earnings per share fell further, down a full 74% in that time. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.
If Smurfit Westrock'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 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 US$395m 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 Smurfit Westrock 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 Smurfit Westrock's Profit Performance
To sum it all up, Smurfit Westrock took a hit from unusual items which pushed its profit down; without that, it would have made more money. 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 Smurfit Westrock's statutory profits give an overly harsh view of the business. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For instance, we've identified 6 warning signs for Smurfit Westrock (2 are a bit concerning) you should be familiar with.