The market rallied behind Metcash Limited's (ASX:MTS) stock, leading do a rise in the share price after its recent weak earnings report. We think that shareholders might be missing some concerning factors that our analysis found.

See our latest analysis for Metcash

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Metcash increased the number of shares on issue by 12% 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. Check out Metcash's historical EPS growth by clicking on this link.

A Look At The Impact Of Metcash's Dilution On Its Earnings Per Share (EPS)

As you can see above, Metcash has been growing its net income over the last few years, with an annualized gain of 6.3% over three years. Net income was down 5.9% over the last twelve months. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 14%. And so, you can see quite clearly that dilution is influencing shareholder earnings.

If Metcash'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.

Our Take On Metcash's Profit Performance

Over the last year Metcash issued new shares and so, there's a noteworthy divergence between EPS and net income growth. Therefore, it seems possible to us that Metcash's true underlying earnings power is actually less than its statutory profit. Sadly, its EPS was down over the last twelve months. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about Metcash as a business, it's important to be aware of any risks it's facing. While conducting our analysis, we found that Metcash has 3 warning signs and it would be unwise to ignore them.

This note has only looked at a single factor that sheds light on the nature of Metcash's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.