The market rallied behind ATI Inc.'s (NYSE:ATI) stock, leading do a rise in the share price after its recent weak earnings report. We think that shareholders might be missing some concerning factors that our analysis found.

See our latest analysis for ATI

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, ATI increased the number of shares on issue by 12% over the last twelve months by issuing new shares. As a result, its net income is now split between a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. Check out ATI's historical EPS growth by clicking on this link.

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

ATI has improved its profit over the last three years, with an annualized gain of 186% in that time. Net profit actually dropped by 11% in the last year. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 13%. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, if ATI's earnings per share can increase, then the share price should too. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

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

Alongside that dilution, it's also important to note that ATI's profit was boosted by unusual items worth US$53m in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. If ATI doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On ATI's Profit Performance

In its last report ATI benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. And furthermore, it went and issued plenty of new shares, ensuring that each shareholder (who did not tip more money in) now owns a smaller proportion of the company. For the reasons mentioned above, we think that a perfunctory glance at ATI's statutory profits might make it look better than it really is on an underlying level. If you'd like to know more about ATI as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 2 warning signs for ATI you should know about.

Our examination of ATI 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.

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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.