Allegro MicroSystems' (NASDAQ:ALGM) Problems Go Beyond Weak Profit

Investors weren't pleased with the recent soft earnings report from Allegro MicroSystems, Inc. (NASDAQ:ALGM). Our analysis suggests that while the headline numbers were soft, there are some positive factors which shareholders may have missed.

Check out our latest analysis for Allegro MicroSystems

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Allegro MicroSystems issued 14% more new shares over the last year. As a result, its net income is now split between a greater number of shares. 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 Allegro MicroSystems' historical EPS growth by clicking on this link.

How Is Dilution Impacting Allegro MicroSystems' Earnings Per Share (EPS)?

Allegro MicroSystems has improved its profit over the last three years, with an annualized gain of 78% in that time. But EPS was only up 20% per year, in the exact same period. Net income was down 69% over the last twelve months. But the EPS result was even worse, with the company recording a decline of 69%. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, if Allegro MicroSystems' 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.

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.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that Allegro MicroSystems' profit suffered from unusual items, which reduced profit by US$25m in the last twelve months. 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. Assuming those unusual expenses don't come up again, we'd therefore expect Allegro MicroSystems to produce a higher profit next year, all else being equal.

Our Take On Allegro MicroSystems' Profit Performance

To sum it all up, Allegro MicroSystems 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 Allegro MicroSystems's profits are an apt reflection of its underlying potential for profit. If you'd like to know more about Allegro MicroSystems as a business, it's important to be aware of any risks it's facing. For example, we've discovered 2 warning signs that you should run your eye over to get a better picture of Allegro MicroSystems.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.