Share Dilution

Omega Energia (BVMF:MEGA3) earnings rest on solid foundation

Omega Energy SA (BVMF:MEGA3) The stock performed well after the recent earnings report. However, we believe investors should be careful when interpreting earnings numbers.

Discover our latest analysis for Omega Energia

BOVESPA: MEGA3 earnings and revenue history March 4, 2022

To understand the value of a company’s earnings growth, it is imperative to consider any dilution of shareholder interests. Omega Energia has increased the number of shares issued by 183% over the past year. Therefore, each stock now receives a smaller portion of the profits. Celebrating net income while ignoring dilution is like rejoicing that you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into multiple slices. You can see a chart of Omega Energia’s EPS by clicking here.

What is the impact of dilution on Omega Energia’s earnings per share? (EPS)

Omega Energia has improved its earnings over the past three years, with an annualized gain of 957% over that period. And at a glance, the profit gain of 1,112% over the past year is impressive. But by comparison, EPS only grew 6,933% over the same period. Therefore, it can be observed that dilution has quite a profound effect on shareholder returns.

Changes in share price tend to reflect changes in earnings per share, over the long term. It will therefore certainly be an advantage for shareholders if Omega Energia can increase EPS persistently. 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.

This might make you wonder what analysts predict in terms of future profitability. Luckily, you can click here to see an interactive chart outlining future profitability, based on their estimates.

How do unusual items affect earnings?

Finally, we must also take into account that unusual items have caused Omega Energia’s net profit to rise by 694 million reais over the past year. While we like to see increases in earnings, we tend to be a little more cautious when unusual items have made a big contribution. When we analyzed the vast majority of listed companies around the world, we found that material unusual items are often not repeated. And that’s as you’d expect, given that these boosts are described as “unusual.” We can see that Omega Energia’s positive unusual items were quite large compared to its profit for the year to December 2021. Accordingly, we can assume that the unusual items make its statutory profit significantly stronger than it wouldn’t be otherwise.

Our view on Omega Energia’s earnings performance

In its latest report, Omega Energia benefited from unusual items that boosted its earnings, which could make earnings look better than it actually is on a sustainable basis. On top of that, dilution means that its earnings per share performance is worse than its profit performance. On reflection, the factors mentioned above give us the strong impression that Omega Energia’s underlying earning power is not as good as it looks based on the statutory earnings figures. With this in mind, we would not consider investing in a stock unless we have a thorough understanding of the risks. Example: we have identified 5 warning signs for Omega Energia you need to be aware and 3 of them are significant.

Our Omega Energia review has focused on some factors that can make its benefits 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.