Last week's profit announcement from Unisem (M) Berhad (KLSE:UNISEM) was underwhelming for investors, despite headline numbers being robust. We think that the market might be paying attention to some underlying factors that they find to be concerning.
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Unisem (M) Berhad increased the number of shares on issue by 6.3% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. 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. Check out Unisem (M) Berhad's historical EPS growth by clicking on this link.
How Is Dilution Impacting Unisem (M) Berhad's Earnings Per Share (EPS)?
Unisem (M) Berhad's net profit dropped by 33% per year over the last three years. On the bright side, in the last twelve months it grew profit by 84%. But EPS was less impressive, up only 81% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.
Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Unisem (M) Berhad shareholders will want to see that EPS figure continue to increase. 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.
The Impact Of Unusual Items On Profit
Finally, we should also consider the fact that unusual items boosted Unisem (M) Berhad's net profit by RM24m over the last year. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. If Unisem (M) Berhad 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 Unisem (M) Berhad's Profit Performance
In its last report Unisem (M) Berhad benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. 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. For the reasons mentioned above, we think that a perfunctory glance at Unisem (M) Berhad's statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into Unisem (M) Berhad, you'd also look into what risks it is currently facing. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of Unisem (M) Berhad.
In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. But there are plenty of other ways to inform your opinion of a company. 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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