Lighthouse Properties' (JSE:LTE) Anemic Earnings Might Be Worse Than You Think

The subdued market reaction suggests that Lighthouse Properties p.l.c.'s (JSE:LTE) recent earnings didn't contain any surprises. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

See our latest analysis for Lighthouse Properties

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Lighthouse Properties expanded the number of shares on issue by 10% over the last year. Therefore, each share now receives a smaller portion of profit. 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 Lighthouse Properties' EPS by clicking here.

How Is Dilution Impacting Lighthouse Properties' Earnings Per Share (EPS)?

Lighthouse Properties was losing money three years ago. Even looking at the last year, profit was still down 84%. 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.

If Lighthouse Properties' EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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 Lighthouse Properties.

How Do Unusual Items Influence Profit?

Finally, we should also consider the fact that unusual items boosted Lighthouse Properties' net profit by €6.9m over the last year. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And that's as you'd expect, given these boosts are described as 'unusual'. If Lighthouse Properties doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Lighthouse Properties' Profit Performance

To sum it all up, Lighthouse Properties got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. And furthermore, it went and issued plenty of new shares, ensuring that each shareholder (who did not tip more money in) now owns a smaller proportion of the company. Considering all this we'd argue Lighthouse Properties' profits probably give an overly generous impression of its sustainable level of profitability. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example, we've found that Lighthouse Properties has 3 warning signs (1 doesn't sit too well with us!) that deserve your attention before going any further with your analysis.

Our examination of Lighthouse Properties has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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.