GFM Services Berhad's (KLSE:GFM) Profits Appear To Have Quality Issues

GFM Services Berhad's (KLSE:GFM) 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.

View our latest analysis for GFM Services Berhad

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. GFM Services Berhad expanded the number of shares on issue by 10% over the last year. That means its earnings are split among 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 GFM Services Berhad's EPS by clicking here.

A Look At The Impact Of GFM Services Berhad's Dilution On Its Earnings Per Share (EPS)

As you can see above, GFM Services Berhad has been growing its net income over the last few years, with an annualized gain of 169% over three years. But EPS was only up 95% per year, in the exact same period. And at a glance the 37% gain in profit over the last year impresses. But in comparison, EPS only increased by 26% over the same period. 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 GFM Services Berhad can grow EPS persistently. 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of GFM Services Berhad.

Our Take On GFM Services Berhad's Profit Performance

GFM Services Berhad shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Because of this, we think that it may be that GFM Services Berhad's statutory profits are better than its underlying earnings power. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Every company has risks, and we've spotted 4 warning signs for GFM Services Berhad (of which 1 can't be ignored!) you should know about.

This note has only looked at a single factor that sheds light on the nature of GFM Services Berhad's profit. 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.