We Think That There Are Issues Underlying Pan Malaysia Corporation Berhad's (KLSE:PMCORP) Earnings

Pan Malaysia Corporation Berhad (KLSE:PMCORP) announced strong profits, but the stock was stagnant. We did some digging, and we found some concerning factors in the details.

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One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Pan Malaysia Corporation Berhad increased the number of shares on issue by 8.9% over the last twelve months by issuing new shares. As a result, its net income is now split between 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 Pan Malaysia Corporation Berhad's historical EPS growth by clicking on this link.

A Look At The Impact Of Pan Malaysia Corporation Berhad's Dilution On Its Earnings Per Share (EPS)

Three years ago, Pan Malaysia Corporation Berhad lost money. Zooming in to the last year, we still can't talk about growth rates coherently, since it made a loss last year. What we do know is that while it's great to see a profit over the last twelve months, that profit would have been better, on a per share basis, if the company hadn't needed to issue shares. So you can see that the dilution has had a bit of an impact on shareholders.

If Pan Malaysia Corporation Berhad'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 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 Pan Malaysia Corporation Berhad.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that Pan Malaysia Corporation Berhad's profit was boosted by unusual items worth RM878k 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. 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 Pan Malaysia Corporation Berhad's Profit Performance

To sum it all up, Pan Malaysia Corporation Berhad 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. Considering all this we'd argue Pan Malaysia Corporation Berhad's profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about Pan Malaysia Corporation Berhad as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 2 warning signs for Pan Malaysia Corporation Berhad you should know about.

Our examination of Pan Malaysia Corporation Berhad 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. 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. 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.