The market was pleased with the recent earnings report from Verra Mobility Corporation (NASDAQ:VRRM), despite the profit numbers being soft. Our analysis suggests that investors may have noticed some promising signs beyond the statutory profit figures.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Verra Mobility expanded the number of shares on issue by 11% over the last year. That means its earnings are split among a greater number of shares. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. Check out Verra Mobility's historical EPS growth by clicking on this link.

How Is Dilution Impacting Verra Mobility's Earnings Per Share (EPS)?

Three years ago, Verra Mobility lost money. And even focusing only on the last twelve months, we see profit is down 6.2%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 13% in the same period. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, if Verra Mobility's earnings per share can increase, then the share price should too. 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.

How Do Unusual Items Influence Profit?

On top of the dilution, we should also consider the US$39m 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 that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Verra Mobility to produce a higher profit next year, all else being equal.

Our Take On Verra Mobility's Profit Performance

Verra Mobility 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 unfortunately the dilution means that shareholders now own a smaller proportion of the company (assuming they maintained the same number of shares). That will weigh on earnings per share, even if it is not reflected in net income. Based on these factors, it's hard to tell if Verra Mobility's profits are a reasonable reflection of its underlying profitability. If you want to do dive deeper into Verra Mobility, you'd also look into what risks it is currently facing. When we did our research, we found 3 warning signs for Verra Mobility (1 is significant!) that we believe deserve your full attention.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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 that insiders are buying.

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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.