Sika Profits (VTX:SIKA) Seems to Have Quality Issues

Sika S.A. (VTX:SIKA) just released a strong earnings report, and the stock has shown some strength. Although the earnings numbers were good, our analysis revealed some concerning factors that shareholders should be aware of.

Discover our latest analysis for Sika

SWX: SIKA Earnings and Revenue History February 26, 2022

To understand the value of a company’s earnings growth, it is imperative to consider any dilution of shareholder interests. It turns out that Sika issued an additional 8.0% of new shares 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 Sika’s EPS by clicking here.

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

As you can see above, Sika has grown its net profit over the past few years, with an annualized gain of 53% over three years. And the 27% increase in profits over the past year certainly seems impressive at first glance. On the other hand, earnings per share increased by only 27% during this period. So you can see that the dilution had a bit of an impact on the shareholders.

In the long run, the benefits per share growth should drive stock price growth. So it will certainly be an advantage for shareholders if Sika can grow EPS persistently. But on the other hand, we would be much less excited to hear that earnings (but not EPS) are improving. 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.

Our view on Sika’s earnings performance

Each Sika share now gets a significantly smaller share of its overall profit, due to the dilution of existing shareholders. For this reason, we believe Sika’s statutory earnings may be better than its underlying earnings capacity. Nevertheless, it should be noted that its earnings per share have increased by 57% over the past three years. Of course, we’ve only scratched the surface when it comes to analyzing its benefits; one could also consider margins, expected growth and return on investment, among other factors. So while the quality of the benefits is important, it is equally important to consider the risks that Sika faces at this stage. You would be interested to know that we have found 3 warning signs for Sika and you will want to know more.

This note has considered only one factor that sheds light on the nature of Sika’s profits. But there are many other ways to inform your opinion about a company. For example, many people view a high return on equity as an indication of a favorable trading economy, while others like to “follow the money” and look for stocks that insiders buy. 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.

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