We're Not Counting On Lahav LR Real Estate (TLV:LAHAV) To Sustain Its Statutory Profitability

Broadly speaking, profitable businesses are less risky than unprofitable ones. 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 Lahav LR Real Estate (TLV:LAHAV).

While Lahav LR Real Estate was able to generate revenue of ₪54.5m in the last twelve months, we think its profit result of ₪32.6m was more important. The chart below shows that revenue has improved over the last three years, and, even better, the company has moved from unprofitable to profitable.

Check out our latest analysis for Lahav LR Real Estate

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. Therefore, today we will consider the nature of Lahav LR Real Estate's statutory earnings with reference to its dilution of shareholders and the impact of unusual items. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Lahav LR Real Estate.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Lahav LR Real Estate expanded the number of shares on issue by 177% 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 Lahav LR Real Estate's historical EPS growth by clicking on this link.

A Look At The Impact Of Lahav LR Real Estate's Dilution on Its Earnings Per Share (EPS).

Three years ago, Lahav LR Real Estate lost money. On the bright side, in the last twelve months it grew profit by 83%. But earnings per share are actually down 20%, over that same period. This is a great example of why it's rather imprudent to rely only on net income as a growth measure. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

If Lahav LR Real Estate'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 the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that Lahav LR Real Estate's profit was boosted by unusual items worth ₪5.5m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. If Lahav LR Real Estate doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Lahav LR Real Estate's Profit Performance

In its last report Lahav LR Real Estate benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. And furthermore, it went and issued plenty of new shares, ensuring that each shareholder (who did not tip more money in) now owns a smaller proportion of the company. For the reasons mentioned above, we think that a perfunctory glance at Lahav LR Real Estate's statutory profits might make it look better than it really is on an underlying level. If you'd like to know more about Lahav LR Real Estate as a business, it's important to be aware of any risks it's facing. Our analysis shows 3 warning signs for Lahav LR Real Estate (2 make us uncomfortable!) and we strongly recommend you look at them before investing.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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. 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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