Why Sungei Bagan Rubber Company (Malaya) Berhad's (KLSE:SBAGAN) Earnings Are Weaker Than They Seem

We didn't see Sungei Bagan Rubber Company (Malaya) Berhad's (KLSE:SBAGAN) stock surge when it reported robust earnings recently. We think that investors might be worried about the foundations the earnings are built on.

See our latest analysis for Sungei Bagan Rubber Company (Malaya) Berhad

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Sungei Bagan Rubber Company (Malaya) Berhad issued 40% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. 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 Sungei Bagan Rubber Company (Malaya) Berhad's historical EPS growth by clicking on this link.

How Is Dilution Impacting Sungei Bagan Rubber Company (Malaya) Berhad's Earnings Per Share (EPS)?

As it happens, we don't know how much the company made or lost three years ago, because we don't have the data. The good news is that profit was up 65% in the last twelve months. But EPS was less impressive, up only 65% in that time. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if Sungei Bagan Rubber Company (Malaya) Berhad 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 Sungei Bagan Rubber Company (Malaya) Berhad.

How Do Unusual Items Influence Profit?

Finally, we should also consider the fact that unusual items boosted Sungei Bagan Rubber Company (Malaya) Berhad's net profit by RM5.8m over the last year. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. Sungei Bagan Rubber Company (Malaya) Berhad had a rather significant contribution from unusual items relative to its profit to June 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Sungei Bagan Rubber Company (Malaya) Berhad's Profit Performance

In its last report Sungei Bagan Rubber Company (Malaya) Berhad benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. And furthermore, it went and issued plenty of new shares, ensuring that each shareholder (who did not tip more money in) now owns a smaller proportion of the company. Considering all this we'd argue Sungei Bagan Rubber Company (Malaya) Berhad's profits probably give an overly generous impression of its sustainable level of profitability. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example, we've discovered 2 warning signs that you should run your eye over to get a better picture of Sungei Bagan Rubber Company (Malaya) Berhad.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. But there are plenty of other ways to inform your opinion of a company. 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 with significant insider holdings 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.