Should You Use Silver Lake Resources's (ASX:SLR) Statutory Earnings To Analyse It?

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. That said, the current statutory profit is not always a good guide to a company's underlying profitability. Today we'll focus on whether this year's statutory profits are a good guide to understanding Silver Lake Resources (ASX:SLR).

It's good to see that over the last twelve months Silver Lake Resources made a profit of AU$6.50m on revenue of AU$301.5m. Happily, it has grown both its profit and revenue over the last three years (though we note its profit is down over the last year).

View our latest analysis for Silver Lake Resources

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. Therefore, today we will consider the nature of Silver Lake Resources's statutory earnings with reference to its dilution of shareholders and the impact of unusual items. 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.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Silver Lake Resources expanded the number of shares on issue by 15% 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. You can see a chart of Silver Lake Resources's EPS by clicking here.

A Look At The Impact Of Silver Lake Resources's Dilution on Its Earnings Per Share (EPS).

Silver Lake Resources has improved its profit over the last three years, with an annualized gain of 47% in that time. In comparison, earnings per share only gained 28% over the same period. Net profit actually dropped by 60% in the last year. But the EPS result was even worth, with the company recording a decline of 65%. 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 returnsAnd so, you can see quite clearly that dilution is influencing shareholder earnings.

If Silver Lake Resources's 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.

How Do Unusual Items Influence Profit?

On top of the dilution, we should also consider the AU$12m impact of unusual items in the last year, which had the effect of suppressing profit. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. Silver Lake Resources took a rather significant hit from unusual items in the year to June 2019. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

Our Take On Silver Lake Resources's Profit Performance

Silver Lake Resources suffered from unusual items which depressed its profit in its last report; if that is not repeated then profit should be higher, all else being equal. But on the other hand, the company issued more shares, so without buying more shares each shareholder will end up with a smaller part of the profit. Based on these factors, we think that Silver Lake Resources's profits are a reasonably conservative guide to its underlying profitability. Ultimately, this article has formed an opinion based on historical data. However, it can also be great to think about what analysts are forecasting for the future. At Simply Wall St, we have analyst estimates which you can view by clicking here.

Our examination of Silver Lake Resources has focussed on certain factors that can make its earnings look better than they are. 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. 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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.