Broadcom's (NASDAQ:AVGO) Weak Earnings May Only Reveal A Part Of The Whole Picture

The market wasn't impressed with the soft earnings from Broadcom Inc. (NASDAQ:AVGO) recently. Our analysis has found some reasons to be concerned, beyond the weak headline numbers.

View our latest analysis for Broadcom

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Broadcom increased the number of shares on issue by 11% 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 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 Broadcom's historical EPS growth by clicking on this link.

How Is Dilution Impacting Broadcom's Earnings Per Share (EPS)?

Broadcom has improved its profit over the last three years, with an annualized gain of 213% in that time. In comparison, earnings per share only gained 199% over the same period. Net income was down 8.5% over the last twelve months. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 11%. Therefore, the dilution is having a noteworthy influence on shareholder returns.

If Broadcom'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 the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

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.

Our Take On Broadcom's Profit Performance

Over the last year Broadcom issued new shares and so, there's a noteworthy divergence between EPS and net income growth. Therefore, it seems possible to us that Broadcom's true underlying earnings power is actually less than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example, we've discovered 4 warning signs that you should run your eye over to get a better picture of Broadcom.

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

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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.