Are Rhone Ma Holdings Berhad's (KLSE:RHONEMA) Statutory Earnings A Good Reflection Of Its Earnings Potential?

As a general rule, we think profitable companies are less risky than companies that lose money. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. This article will consider whether Rhone Ma Holdings Berhad's (KLSE:RHONEMA) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months Rhone Ma Holdings Berhad made a profit of RM6.89m on revenue of RM135.6m. As you can see in the chart below, its profit has declined over the last three years, even though its revenue has increased.

View our latest analysis for Rhone Ma Holdings Berhad

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. In this article we will consider how Rhone Ma Holdings Berhad's decision to issue new shares in the company has impacted returns to shareholders. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Rhone Ma Holdings Berhad.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Rhone Ma Holdings Berhad issued 10.0% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. 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. Check out Rhone Ma Holdings Berhad's historical EPS growth by clicking on this link.

A Look At The Impact Of Rhone Ma Holdings Berhad's Dilution on Its Earnings Per Share (EPS).

Unfortunately, Rhone Ma Holdings Berhad's profit is down 19% per year over three years. Even looking at the last year, profit was still down 21%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 24% in the same period. So you can see that the dilution has had a bit of an impact on shareholders. Therefore, the dilution is having a noteworthy influence on shareholder returns. And so, you can see quite clearly that dilution is influencing shareholder earnings.

If Rhone Ma Holdings 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.

Our Take On Rhone Ma Holdings Berhad's Profit Performance

Rhone Ma Holdings Berhad issued shares during the year, and that means its EPS performance lags its net income growth. Because of this, we think that it may be that Rhone Ma Holdings Berhad's statutory profits are better than its underlying earnings power. In further bad news, its earnings per share decreased in the last year. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For example, Rhone Ma Holdings Berhad has 5 warning signs (and 1 which can't be ignored) we think you should know about.

This note has only looked at a single factor that sheds light on the nature of Rhone Ma Holdings Berhad's profit. 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 that insiders are buying.

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This article by Simply Wall St is general in nature. 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.
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