Shareholders shouldn’t be too comfortable with Coty’s strong earnings (NYSE:COTY)

We have not seen Coty Inc. (NYSE:COTY) Stocks surged when they recently reported strong earnings. We took a deeper look at the numbers and found that shareholders might be concerned about some underlying weaknesses.

See our latest analysis for Coty

NYSE: COTY Earnings and Revenue History as of September 3, 2022

In order to understand the potential return per share, it is essential to consider how much a company dilutes shareholders. It turns out that Coty has issued 9.5% more 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 bigger pizza, but ignoring the fact that the pizza is now cut into multiple slices. Learn about Coty’s historic EPS growth by clicking this link.

A look at the impact of Coty’s dilution on its earnings per share (EPS)

Coty was losing money three years ago. And even focusing only on the last twelve months, we don’t have a significant growth rate, because also a year ago there was a loss. What we do know is that while it is good to see a profit over the last twelve months, that profit would have been better, per share, if the company had not needed to issue shares. Therefore, dilution has a significant influence on shareholder returns.

In the long run, if Coty’s earnings per share may rise, the stock price should also rise. However, if its earnings increase while its earnings per share remain stable (or even decline), shareholders might not see much benefit. For this reason, one could argue that EPS is more important than long-term net income, assuming the goal is to gauge whether a company’s stock price can rise.

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 consider that unusual items have boosted Coty’s net income by $304 million over the past year. While we like to see increases in earnings, we tend to be a bit more cautious when unusual items have made a big contribution. When we analyzed the numbers of thousands of publicly traded companies, we found that an increase in unusual items in any given year is often not repeated the following year. Which is hardly surprising, given the name. Coty had a fairly large contribution of unusual items to its profit through June 2022. As a result, we can assume that the unusual items significantly boost its statutory profit than it would otherwise.

Our view on Coty’s earnings performance

In its latest report, Coty 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. For the reasons mentioned above, we think a cursory look at Coty’s statutory earnings might make it look better than it actually is on an underlying level. So, if you want to dig deeper into this stock, it is crucial to consider the risks it faces. For example, Coty has 3 warning signs (and 1 which is a little obnoxious) that we think you should know about.

In this article, we’ve looked at a number of factors that can detract from the usefulness of profit numbers, and came out cautious. But there are many other ways to inform your opinion about a company. 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.

Calculation of discounted cash flows for each share

Simply Wall St performs a detailed calculation of discounted cash flow every 6 hours for every stock in the market, so if you want to find the intrinsic value of any company, just search here. It’s free.

Comments are closed.