Should You Rely On Simulations Plus's (NASDAQ:SLP) Earnings Growth?

By
Simply Wall St
Published
October 27, 2020
NasdaqCM:SLP

As a general rule, we think profitable companies are less risky than companies that lose money. That said, the current statutory profit is not always a good guide to a company's underlying profitability. Today we'll focus on whether this year's statutory profits are a good guide to understanding Simulations Plus (NASDAQ:SLP).

While Simulations Plus was able to generate revenue of US$40.1m in the last twelve months, we think its profit result of US$9.20m was more important. In the chart below, you can see that its profit and revenue have both grown over the last three years.

See our latest analysis for Simulations Plus

earnings-and-revenue-history
NasdaqCM:SLP Earnings and Revenue History October 27th 2020

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. In this article we'll look at how Simulations Plus is impacting shareholders by issuing new shares, as well as how unusual items have affected the income line. That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Simulations Plus expanded the number of shares on issue by 14% over the last year. 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. You can see a chart of Simulations Plus' EPS by clicking here.

A Look At The Impact Of Simulations Plus' Dilution on Its Earnings Per Share (EPS).

As you can see above, Simulations Plus has been growing its net income over the last few years, with an annualized gain of 69% over three years. And over the last 12 months, the company grew its profit by 17%. On the other hand, earnings per share are only up 16% in that time. 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.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Simulations Plus shareholders will want to see that EPS figure continue to increase. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

The Impact Of Unusual Items On Profit

On top of the dilution, we should also consider the US$1.5m impact of unusual items in the last year, which had the effect of suppressing profit. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. If Simulations Plus doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Simulations Plus' Profit Performance

To sum it all up, Simulations Plus took a hit from unusual items which pushed its profit down; without that, it would have made more money. But unfortunately the dilution means that shareholders now own a smaller proportion of the company (assuming they maintained the same number of shares). That will weigh on earnings per share, even if it is not reflected in net income. Given the contrasting considerations, we don't have a strong view as to whether Simulations Plus's profits are an apt reflection of its underlying potential for profit. If you want to do dive deeper into Simulations Plus, you'd also look into what risks it is currently facing. For example - Simulations Plus has 1 warning sign we think you should be aware of.

Our examination of Simulations Plus has focussed on certain factors that can make its earnings look better than they are. 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 that insiders are buying to be useful.

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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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