As a general rule, we think profitable companies are less risky than companies that lose money. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. In this article, we’ll look at how useful this year’s statutory profit is, when analysing Advanced Micro Devices (NASDAQ:AMD).
While Advanced Micro Devices was able to generate revenue of US$8.65b in the last twelve months, we think its profit result of US$879.0m was more important. The chart below shows that revenue has improved over the last three years, and, even better, the company has moved from unprofitable to profitable.
View our latest analysis for Advanced Micro Devices
Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. Therefore, today we will consider the nature of Advanced Micro Devices’ statutory earnings with reference to its dilution of shareholders and the impact of unusual items. 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.
To understand the value of a company’s earnings growth, it is imperative to consider any dilution of shareholders’ interests. As it happens, Advanced Micro Devices issued 5.8% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. 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 Advanced Micro Devices’ EPS by clicking here.
A Look At The Impact Of Advanced Micro Devices’ Dilution on Its Earnings Per Share (EPS).
Advanced Micro Devices was losing money three years ago. The good news is that profit was up 321% in the last twelve months. On the other hand, earnings per share are only up 281% over the same period. So you can see that the dilution has had a bit of an impact on shareholders. Therefore, the dilution is having a noteworthy influence on shareholder returns. And so, you can see quite clearly that dilution is influencing shareholder earnings.
In the long term, earnings per share growth should beget share price growth. So Advanced Micro Devices shareholders will want to see that EPS figure continue to increase. 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.
The Impact Of Unusual Items On Profit
Alongside that dilution, it’s also important to note that Advanced Micro Devices’ profit suffered from unusual items, which reduced profit by US$166m in the last twelve months. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that’s hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don’t come up again, we’d therefore expect Advanced Micro Devices to produce a higher profit next year, all else being equal.
Our Take On Advanced Micro Devices’ Profit Performance
To sum it all up, Advanced Micro Devices took a hit from unusual items which pushed its profit down; without that, it would have made more money. But unfortunately the dilution means that shareholders now own a smaller proportion of the company (assuming they maintained the same number of shares). That will weigh on earnings per share, even if it is not reflected in net income. Given the contrasting considerations, we don’t have a strong view as to whether Advanced Micro Devices’s profits are an apt reflection of its underlying potential for profit. So while earnings quality is important, it’s equally important to consider the risks facing Advanced Micro Devices at this point in time. Case in point: We’ve spotted 2 warning signs for Advanced Micro Devices you should be aware of.
In this article we’ve looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.
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This article by Simply Wall St is general in nature. 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.
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