We believe Energy Services of America (NASDAQ:ESOA) earnings are a poor guide to profitability

Although Energy Services of America Corporation (NASDAQ:ESOA) posted strong earnings recently, the stock did not react significantly. We think investors might be concerned about the foundations on which earnings are based.

See our latest analysis for Energy Services of America

NasdaqCM: ESOA Earnings and Revenue History May 21, 2022

In order to understand the potential return per share, it is essential to consider how much a company dilutes shareholders. Energy Services of America has increased the number of shares issued by 22% over the past year. As a result, his net income is now spread across a larger number of shares. Talking about net profit, without noticing earnings per share, is being distracted by the big numbers while ignoring the small numbers that speak to per share value. Learn about Energy Services of America’s historic EPS growth by clicking this link.

A look at Energy Services’ impact of US dilution on its earnings per share (EPS).

As you can see above, Energy Services of America has grown its net income over the past few years, with a three-year annualized gain of 361%. But EPS has only increased by 337% per year, in exactly the same period. And the 495% increase in profits over the past year certainly seems impressive at first glance. On the other hand, earnings per share increased by only 445% during this period. And so, you can see pretty clearly that dilution influences shareholder earnings.

Changes in share price tend to reflect changes in earnings per share, over the long term. So it will certainly be a benefit to shareholders if Energy Services of America can persistently increase EPS. However, if its earnings increase while its earnings per share remain stable (or even decline), shareholders might not see much benefit. For the ordinary retail shareholder, EPS is an excellent metric to verify your hypothetical “share” of company earnings.

To note: we always recommend that investors check the strength of the balance sheet. Click here to access our analysis of Energy Services of America’s balance sheet.

The impact of unusual items on earnings

Finally, consider the fact that unusual items have increased Energy Services of America’s net income by US$10 million over the past year. While it’s always nice to have higher profits, sometimes a large contribution from unusual items dampens our enthusiasm. We have analyzed the figures of most publicly traded companies around the world, and it is very common for unusual items to be unique in nature. Which is hardly surprising, given the name. We can see that Energy Services of America’s positive unusual items were quite large compared to its profit for the year to March 2022. As a result, we can assume that the unusual items make its statutory profit significantly higher than would not be otherwise.

Our view on the earnings performance of US energy services

To sum up, Energy Services of America got a nice boost to take advantage of unusual items; without it, its statutory results would have looked worse. And what’s more, he went and issued a lot of new shares, ensuring that each shareholder (who didn’t contribute more money) now owns a smaller proportion of the company. Given all of this, we would say that Energy Services of America’s earnings probably give too generous an impression of its level of sustainable profitability. Keep in mind that when it comes to analyzing a stock, it is worth noting the risks involved. Every business has risks, and we’ve spotted 4 warning signs for Energy Services of America you should know.

Our review of Energy Services of America focused on some factors that can make its earnings look better than they are. And, based on that, we’re somewhat skeptical. But there’s always more to discover if you’re able to focus on the details. Some people consider a high return on equity to be a good sign of a quality company. So you might want to see this free collection of companies offering a high return on equity, or this list of stocks that insiders buy.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.