Shareholders were pleased with the recent earnings report from Ligand Pharmaceuticals Incorporated (NASDAQ:LGND). However, we think that investors should be cautious when interpreting the profit numbers.

See our latest analysis for Ligand Pharmaceuticals

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Ligand Pharmaceuticals expanded the number of shares on issue by 8.4% over the last year. As a result, its net income is now split between a greater number of shares. 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. You can see a chart of Ligand Pharmaceuticals' EPS by clicking here.

A Look At The Impact Of Ligand Pharmaceuticals' Dilution On Its Earnings Per Share (EPS)

Ligand Pharmaceuticals' net profit dropped by 34% per year over the last three years. The good news is that profit was up 114% in the last twelve months. But EPS was less impressive, up only 105% in that time. So you can see that the dilution has had a bit of an impact on shareholders.

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 Ligand Pharmaceuticals can grow EPS persistently. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. 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.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted Ligand Pharmaceuticals' net profit by US$88m over the last year. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. We can see that Ligand Pharmaceuticals' positive unusual items were quite significant relative to its profit in the year to September 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Ligand Pharmaceuticals' Profit Performance

To sum it all up, Ligand Pharmaceuticals got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. On top of that, the dilution means that its earnings per share performance is worse than its profit performance. For the reasons mentioned above, we think that a perfunctory glance at Ligand Pharmaceuticals' statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into Ligand Pharmaceuticals, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 3 warning signs for Ligand Pharmaceuticals and you'll want to know about them.

Our examination of Ligand Pharmaceuticals has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. But there are plenty of other ways to inform your opinion of a company. 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 with significant insider holdings to be useful.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.