Investors were disappointed by Verve Group SE's (ETR:M8G ) latest earnings release. Our analysis has found some reasons to be concerned, beyond the weak headline numbers.

We've discovered 5 warning signs about Verve Group. View them for free.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Verve Group issued 18% more new shares over the last year. That means its earnings are split among a greater number of shares. 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. Check out Verve Group's historical EPS growth by clicking on this link.

How Is Dilution Impacting Verve Group's Earnings Per Share (EPS)?

We don't have any data on the company's profits from three years ago. Even looking at the last year, profit was still down 38%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 43% in the same period. So you can see that the dilution has had a bit of an impact on shareholders.

If Verve Group's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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

Alongside that dilution, it's also important to note that Verve Group's profit was boosted by unusual items worth €16m in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. 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 that's as you'd expect, given these boosts are described as 'unusual'. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Verve Group's Profit Performance

To sum it all up, Verve Group 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. Considering all this we'd argue Verve Group's profits probably give an overly generous impression of its sustainable level of profitability. So while earnings quality is important, it's equally important to consider the risks facing Verve Group at this point in time. Case in point: We've spotted 5 warning signs for Verve Group you should be mindful of and 1 of these is potentially serious.

Our examination of Verve Group 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. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. 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.