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Saturn Oil & Gas Inc. (TSE:SOIL) recently released a strong earnings report, and the market responded by raising the share price. Despite the strong profit numbers, we believe that there are some deeper issues which investors should look into.
To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, Saturn Oil & Gas increased the number of shares on issue by 21% over the last twelve months by issuing new shares. 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. You can see a chart of Saturn Oil & Gas' EPS by clicking here.
A Look At The Impact Of Saturn Oil & Gas' Dilution On Its Earnings Per Share (EPS)
Three years ago, Saturn Oil & Gas lost money. The good news is that profit was up 1,703% in the last twelve months. But EPS was less impressive, up only 1,222% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.
In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Saturn Oil & Gas can grow EPS persistently. 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.
Operating Revenue Or Not?
Companies will classify their revenue streams as either operating revenue or other revenue. Oftentimes, non-operating revenue spikes are not repeated, so it makes sense to be cautious where non-operating revenue has made a very large contribution to total profit. Importantly, the non-operating revenue often comes without associated ongoing costs, so it can boost profit by letting it fall straight to the bottom line, making the operating business seem better than it really is. As well as the aforementioned dilution, Saturn Oil & Gas saw a spike in non-operating revenue, over the last year. In fact, our data indicates that non-operating revenue increased from CA$12.8m to CA$114.8m. The high levels of non-operating revenue are problematic because if (and when) they do not repeat, then overall revenue (and profitability) of the firm will fall. Sometimes, you can get a better idea of the underlying earnings potential of a company by excluding unusual boosts to non-operating revenue.