Despite announcing strong earnings, VSE Corporation's (NASDAQ:VSEC) stock was sluggish. We think that the market might be paying attention to some underlying factors that they find to be concerning.
To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, VSE increased the number of shares on issue by 43% over the last twelve months by issuing new shares. 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 VSE's EPS by clicking here.
A Look At The Impact Of VSE's Dilution On Its Earnings Per Share (EPS)
VSE was losing money three years ago. On the bright side, in the last twelve months it grew profit by 65%. But EPS was less impressive, up only 43% in that time. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.
In the long term, earnings per share growth should beget share price growth. So VSE shareholders will want to see that EPS figure continue to increase. 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.
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 VSE's Profit Performance
VSE shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. For this reason, we think that VSE's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The good news is that, its earnings per share increased by 43% in the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing VSE at this point in time. When we did our research, we found 2 warning signs for VSE (1 shouldn't be ignored!) that we believe deserve your full attention.
This note has only looked at a single factor that sheds light on the nature of VSE's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks with significant insider holdings to be useful.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.