Solid Earnings May Not Tell The Whole Story For Kimberly-Clark (NASDAQ:KMB)
Kimberly-Clark Corporation's (NASDAQ:KMB) healthy profit numbers didn't contain any surprises for investors. 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. In fact, Kimberly-Clark increased the number of shares on issue by 85% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out Kimberly-Clark's historical EPS growth by clicking on this link.
A Look At The Impact Of Kimberly-Clark's Dilution On Its Earnings Per Share (EPS)
As you can see above, Kimberly-Clark's net profit is roughly the same as what it was three years ago. The fact that profit was up 10% last year gives a good impression. Then again, EPS was only up 10% over that period. So you can see that the dilution has had a fairly significant impact on shareholders.
Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Kimberly-Clark 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 that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.
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.
How Do Unusual Items Influence Profit?
On top of the dilution, we should also consider the US$513m impact of unusual items in the last year, which had the effect of suppressing profit. 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 Kimberly-Clark to produce a higher profit next year, all else being equal.
Our Take On Kimberly-Clark's Profit Performance
Kimberly-Clark suffered from unusual items which depressed its profit in its last report; if that is not repeated then profit should be higher, all else being equal. 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. Having considered these factors, we don't think Kimberly-Clark's statutory profits give an overly harsh view of the business. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Be aware that Kimberly-Clark is showing 3 warning signs in our investment analysis and 2 of those are significant...
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. 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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