Are Lambo Group Berhad's (KLSE:LAMBO) Statutory Earnings A Good Reflection Of Its Earnings Potential?

Broadly speaking, profitable businesses are less risky than unprofitable ones. 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 Lambo Group Berhad's (KLSE:LAMBO) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months Lambo Group Berhad made a profit of RM10.1m on revenue of RM63.3m. The good news is that the company managed to grow its revenue over the last three years, and also move from loss-making to profitable.

View our latest analysis for Lambo Group 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 Lambo Group 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 Lambo Group Berhad.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Lambo Group Berhad expanded the number of shares on issue by 6.3% over the last year. As a result, its net income is now split between a greater number of shares. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. You can see a chart of Lambo Group Berhad's EPS by clicking here.

How Is Dilution Impacting Lambo Group Berhad's Earnings Per Share? (EPS)

Three years ago, Lambo Group Berhad lost money. And even focusing only on the last twelve months, we see profit is down 40%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 40% 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 Lambo Group 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 Lambo Group Berhad's Profit Performance

Lambo Group Berhad issued shares during the year, and that means its EPS performance lags its net income growth. Therefore, it seems possible to us that Lambo Group Berhad's true underlying earnings power is actually less than its statutory profit. In further bad news, its earnings per share decreased in the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing Lambo Group Berhad at this point in time. Every company has risks, and we've spotted 3 warning signs for Lambo Group Berhad you should know about.

Today we've zoomed in on a single data point to better understand the nature of Lambo Group Berhad's profit. 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. 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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.