Additional Considerations Required While Assessing Lloyds Enterprises' (NSE:LLOYDPP) Strong Earnings

Lloyds Enterprises Limited (NSE:LLOYDPP) announced strong profits, but the stock was stagnant. Our analysis suggests that shareholders have noticed something concerning in the numbers.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Lloyds Enterprises expanded the number of shares on issue by 20% over the last year. That means its earnings are split among a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of Lloyds Enterprises' EPS by clicking here.

How Is Dilution Impacting Lloyds Enterprises' Earnings Per Share (EPS)?

Lloyds Enterprises has improved its profit over the last three years, with an annualized gain of 74% in that time. And at a glance the 159% gain in profit over the last year impresses. On the other hand, earnings per share are only up 183% in that time. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Lloyds Enterprises can grow EPS persistently. 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Lloyds Enterprises.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that Lloyds Enterprises' profit was boosted by unusual items worth ₹207m in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. If Lloyds Enterprises 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 Lloyds Enterprises' Profit Performance

In its last report Lloyds Enterprises benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. On top of that, the dilution means that its earnings per share performance is worse than its profit performance. For the reasons mentioned above, we think that a perfunctory glance at Lloyds Enterprises' statutory profits might make it look better than it really is on an underlying level. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. While conducting our analysis, we found that Lloyds Enterprises has 1 warning sign and it would be unwise to ignore it.

Our examination of Lloyds Enterprises has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 with high insider ownership.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.