Stock Analysis

RPM Automotive Group's (ASX:RPM) Solid Profits Have Weak Fundamentals

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ASX:RPM
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RPM Automotive Group Limited (ASX:RPM) announced strong profits, but the stock was stagnant. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

Check out our latest analysis for RPM Automotive Group

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ASX:RPM Earnings and Revenue History March 5th 2021

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, RPM Automotive Group issued 33% more new shares over the last year. That means its earnings are split among 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. Check out RPM Automotive Group's historical EPS growth by clicking on this link.

A Look At The Impact Of RPM Automotive Group's Dilution on Its Earnings Per Share (EPS).

We don't have any data on the company's profits from three years ago. And even focusing only on the last twelve months, we don't have a meaningful growth rate because it made a loss a year ago, too. But mathematics aside, it is always good to see when a formerly unprofitable business come good (though we accept profit would have been higher if dilution had not been required). Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

In the long term, if RPM Automotive Group'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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of RPM Automotive Group.

Our Take On RPM Automotive Group's Profit Performance

Over the last year RPM Automotive Group issued new shares and so, there's a noteworthy divergence between EPS and net income growth. For this reason, we think that RPM Automotive Group's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. On the bright side, the company showed enough improvement to book a profit this year, after losing money last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you'd like to know more about RPM Automotive Group as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 3 warning signs for RPM Automotive Group you should know about.

This note has only looked at a single factor that sheds light on the nature of RPM Automotive Group's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 that insiders are buying to be useful.

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