Should You Use Exchange Income’s (TSE:EIF) Statutory Earnings To Analyse It?

As a general rule, we think profitable companies are less risky than companies that lose money. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. This article will consider whether Exchange Income‘s (TSE:EIF) statutory profits are a good guide to its underlying earnings.

It’s good to see that over the last twelve months Exchange Income made a profit of CA$70.9m on revenue of CA$1.35b. One positive is that it has grown both its profit and its revenue, over the last few years.

See our latest analysis for Exchange Income

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. In this article we’ll look at how Exchange Income is impacting shareholders by issuing new shares. 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.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, Exchange Income issued 8.1% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. 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 Exchange Income’s EPS by clicking here.

A Look At The Impact Of Exchange Income’s Dilution on Its Earnings Per Share (EPS).

As you can see above, Exchange Income has been growing its net income over the last few years, with an annualized gain of 24% over three years. But EPS was only up 7.9% per year, in the exact same period. However, net income was pretty flat over the last year with a miniscule increase. Meanwhile, EPS was actually down a full 3.9% over the period, highlighting just how different the profits look from a per-share perspective. So you can see that the dilution has had a bit of an impact on shareholders. Therefore, the dilution is having a noteworthy influence on shareholder returns. And so, you can see quite clearly that dilution is influencing shareholder earnings.

If Exchange Income’s EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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.