We didn't see Eastern & Oriental Berhad's (KLSE:E&O) stock surge when it reported robust earnings recently. We looked deeper into the numbers and found that shareholders might be concerned with some underlying weaknesses.
Check out our latest analysis for Eastern & Oriental Berhad
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Eastern & Oriental Berhad expanded the number of shares on issue by 36% over the last year. That means its earnings are split among 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. You can see a chart of Eastern & Oriental Berhad's EPS by clicking here.
A Look At The Impact Of Eastern & Oriental Berhad's Dilution On Its Earnings Per Share (EPS)
Eastern & Oriental Berhad was losing money three years ago. The good news is that profit was up 200% in the last twelve months. On the other hand, earnings per share are only up 151% over the same period. So you can see that the dilution has had a fairly significant impact on shareholders.
In the long term, earnings per share growth should beget share price growth. So Eastern & Oriental 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 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.
How Do Unusual Items Influence Profit?
Finally, we should also consider the fact that unusual items boosted Eastern & Oriental Berhad's net profit by RM41m 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 analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. Eastern & Oriental Berhad had a rather significant contribution from unusual items relative to its profit to March 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.