The market wasn't impressed with the soft earnings from Broadcom Inc. (NASDAQ:AVGO) recently. We did some further digging and think they have a few more reasons to be concerned beyond the statutory profit.
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Broadcom expanded the number of shares on issue by 11% over the last year. 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 Broadcom's historical EPS growth by clicking on this link.
A Look At The Impact Of Broadcom's Dilution On Its Earnings Per Share (EPS)
Broadcom has improved its profit over the last three years, with an annualized gain of 213% in that time. But EPS was only up 199% per year, in the exact same period. Net profit actually dropped by 8.5% in the last year. But the EPS result was even worse, with the company recording a decline of 11%. So you can see that the dilution has had a bit of an impact on shareholders.
If Broadcom's 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.
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
Broadcom issued shares during the year, and that means its EPS performance lags its net income growth. Because of this, we think that it may be that Broadcom's statutory profits are better than its underlying earnings power. But the good news is that its EPS growth over the last three years has been very impressive. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing Broadcom at this point in time. For example, we've discovered 4 warning signs that you should run your eye over to get a better picture of Broadcom.
Today we've zoomed in on a single data point to better understand the nature of Broadcom's profit. 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 that insiders are buying 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.