Weak Statutory Earnings May Not Tell The Whole Story For Cape EMS Berhad (KLSE:CEB)

The market wasn't impressed with the soft earnings from Cape EMS Berhad (KLSE:CEB) recently. Our analysis has found some reasons to be concerned, beyond the weak headline numbers.

View our latest analysis for Cape EMS Berhad

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Cape EMS Berhad increased the number of shares on issue by 7.5% over the last twelve months by issuing new shares. 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. Check out Cape EMS Berhad's historical EPS growth by clicking on this link.

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

Unfortunately, Cape EMS Berhad's profit is down 65% per year over three years. And even focusing only on the last twelve months, we see profit is down 82%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 85% in the same period. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, if Cape EMS Berhad's earnings per share can increase, then the share price should too. 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 Cape EMS Berhad.

Our Take On Cape EMS Berhad's Profit Performance

Cape EMS Berhad issued shares during the year, and that means its EPS performance lags its net income growth. Therefore, it seems possible to us that Cape EMS 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Case in point: We've spotted 4 warning signs for Cape EMS Berhad you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Cape EMS 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 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.