Does Companhia de Locação das Américas's (BVMF:LCAM3) Statutory Profit Adequately Reflect Its Underlying Profit?

As a general rule, we think profitable companies are less risky than companies that lose money. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. In this article, we'll look at how useful this year's statutory profit is, when analysing Companhia de Locação das Américas (BVMF:LCAM3).

It's good to see that over the last twelve months Companhia de Locação das Américas made a profit of R$247.5m on revenue of R$4.73b. In the chart below, you can see that its profit and revenue have both grown over the last three years, although its profit has slipped in the last twelve months.

View our latest analysis for Companhia de Locação das Américas

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. In this article we will consider how Companhia de Locação das Américas' decision to issue new shares in the company has impacted returns to shareholders. 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.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Companhia de Locação das Américas expanded the number of shares on issue by 14% over the last year. As a result, its net income is now split between 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 Companhia de Locação das Américas' historical EPS growth by clicking on this link.

A Look At The Impact Of Companhia de Locação das Américas' Dilution on Its Earnings Per Share (EPS).

As you can see above, Companhia de Locação das Américas has been growing its net income over the last few years, with an annualized gain of 548% over three years. In comparison, earnings per share only gained 162% over the same period. Net profit actually dropped by 11% in the last year. But the EPS result was even worth, with the company recording a decline of 9.0%. 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.

If Companhia de Locação das Américas' EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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.

Our Take On Companhia de Locação das Américas' Profit Performance

Companhia de Locação das Américas issued shares during the year, and that means its EPS performance lags its net income growth. Because of this, we think that it may be that Companhia de Locação das Américas' statutory profits are better than its underlying earnings power. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing Companhia de Locação das Américas at this point in time. To that end, you should learn about the 4 warning signs we've spotted with Companhia de Locação das Américas (including 1 which is significant).

Today we've zoomed in on a single data point to better understand the nature of Companhia de Locação das Américas' profit. 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 that insiders are buying.

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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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