Should You Use Carasso Motors' (TLV:CRSO) 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. 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. Today we'll focus on whether this year's statutory profits are a good guide to understanding Carasso Motors (TLV:CRSO).

It's good to see that over the last twelve months Carasso Motors made a profit of ₪120.4m on revenue of ₪3.60b. In the last few years both its revenue and its profit have fallen, as you can see in the chart below.

View our latest analysis for Carasso Motors

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 Carasso Motors is impacting shareholders by issuing new shares. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Carasso Motors.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Carasso Motors 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 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 Carasso Motors' EPS by clicking here.

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

Unfortunately, Carasso Motors' profit is down 45% per year over three years. And even focusing only on the last twelve months, we see profit is down 13%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 18% in the same period. 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.

If Carasso Motors' 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.

Our Take On Carasso Motors' Profit Performance

Carasso Motors issued shares during the year, and that means its EPS performance lags its net income growth. Because of this, we think that it may be that Carasso Motors' statutory profits are better than its underlying earnings power. Sadly, its EPS was down over the last twelve months. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. When we did our research, we found 4 warning signs for Carasso Motors (2 don't sit too well with us!) that we believe deserve your full attention.

Today we've zoomed in on a single data point to better understand the nature of Carasso Motors' profit. 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.

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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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