Stock Analysis

Are Bapcor's (ASX:BAP) Statutory Earnings A Good Guide To Its Underlying Profitability?

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ASX:BAP
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It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether Bapcor's (ASX:BAP) statutory profits are a good guide to its underlying earnings.

We like the fact that Bapcor made a profit of AU$79.2m on its revenue of AU$1.46b, in the last year. 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).

Check out our latest analysis for Bapcor

earnings-and-revenue-history
ASX:BAP Earnings and Revenue History January 7th 2021

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. In this article we'll look at how Bapcor is impacting shareholders by issuing new shares. 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. As it happens, Bapcor issued 19% 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. You can see a chart of Bapcor's EPS by clicking here.

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

Bapcor has improved its profit over the last three years, with an annualized gain of 47% in that time. But EPS was only up 35% per year, in the exact same period. Net income was down 18% over the last twelve months. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 22%. 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.

In the long term, if Bapcor's earnings per share can increase, then the share price should too. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On Bapcor's Profit Performance

Over the last year Bapcor issued new shares and so, there's a noteworthy divergence between EPS and net income growth. Because of this, we think that it may be that Bapcor's statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 35% per annum growth in EPS for the last three. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So while earnings quality is important, it's equally important to consider the risks facing Bapcor at this point in time. At Simply Wall St, we found 2 warning signs for Bapcor and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Bapcor's profit. 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. 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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