TOTVS' (BVMF:TOTS3) Profits Appear To Have Quality Issues

By
Simply Wall St
Published
May 11, 2022
BOVESPA:TOTS3
Source: Shutterstock

TOTVS S.A.'s (BVMF:TOTS3) healthy profit numbers didn't contain any surprises for investors. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.

Check out our latest analysis for TOTVS

earnings-and-revenue-history
BOVESPA:TOTS3 Earnings and Revenue History May 11th 2022

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, TOTVS issued 7.1% 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. You can see a chart of TOTVS' EPS by clicking here.

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

TOTVS has improved its profit over the last three years, with an annualized gain of 152% in that time. But EPS was only up 110% per year, in the exact same period. And over the last 12 months, the company grew its profit by 17%. But in comparison, EPS only increased by 12% over the same period. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So TOTVS shareholders will want to see that EPS figure continue to increase. 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.

Our Take On TOTVS' Profit Performance

TOTVS shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Therefore, it seems possible to us that TOTVS' true underlying earnings power is actually less than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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 want to do dive deeper into TOTVS, you'd also look into what risks it is currently facing. For example, we've discovered 2 warning signs that you should run your eye over to get a better picture of TOTVS.

Today we've zoomed in on a single data point to better understand the nature of TOTVS' profit. But there are plenty of other ways to inform your opinion of a company. 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.

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