Ferrari's (BIT:RACE) Solid Earnings May Rest On Weak Foundations
Ferrari N.V.'s (BIT:RACE) robust recent earnings didn't do much to move the stock. However the statutory profit number doesn't tell the whole story, and we have found some factors which might be of concern to shareholders.
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Ferrari issued 8.0% more new shares over the last year. As a result, its net income is now split between 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. You can see a chart of Ferrari's EPS by clicking here.
How Is Dilution Impacting Ferrari's Earnings Per Share (EPS)?
As you can see above, Ferrari has been growing its net income over the last few years, with an annualized gain of 52% over three years. And in the last year the company managed to bump profit up by 2.6%. On the other hand, earnings per share are only up 3.6% in that time. And so, you can see quite clearly that dilution is influencing shareholder earnings.
Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if Ferrari can grow EPS persistently. 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 Ferrari's Profit Performance
Each Ferrari share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Therefore, it seems possible to us that Ferrari's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 56% per annum growth in EPS for the last three. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you want to do dive deeper into Ferrari, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 1 warning sign for Ferrari and you'll want to know about this.
This note has only looked at a single factor that sheds light on the nature of Ferrari'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.