Lorenzini Apparels' (NSE:LAL) Solid Earnings May Rest On Weak Foundations

Following the solid earnings report from Lorenzini Apparels Limited (NSE:LAL), the market responded by bidding up the stock price. However, we think that shareholders should be cautious as we found some worrying factors underlying the profit.

Check out our latest analysis for Lorenzini Apparels

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Lorenzini Apparels issued 9.1% more new shares 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. Check out Lorenzini Apparels' historical EPS growth by clicking on this link.

A Look At The Impact Of Lorenzini Apparels' Dilution On Its Earnings Per Share (EPS)

Lorenzini Apparels was losing money three years ago. The good news is that profit was up 404% in the last twelve months. On the other hand, earnings per share are only up 374% over the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Lorenzini Apparels shareholders will want to see that EPS figure continue to increase. 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.

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

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that Lorenzini Apparels' profit was boosted by unusual items worth ₹16m in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. 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. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Lorenzini Apparels' Profit Performance

To sum it all up, Lorenzini Apparels got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. 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 Lorenzini Apparels' statutory profits might make it look better than it really is on an underlying level. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. When we did our research, we found 3 warning signs for Lorenzini Apparels (1 makes us a bit uncomfortable!) that we believe deserve your full attention.

Our examination of Lorenzini Apparels 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 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 with high insider ownership.

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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.