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SWS Capital Berhad’s (KLSE:SWSCAP) Earnings Are Of Questionable Quality

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SWS Capital Berhad’s (KLSE:SWSCAP) robust earnings report didn’t manage to move the market for its stock. We did some digging, and we found some concerning factors in the details.

Our analysis indicates that SWSCAP is potentially undervalued!

earnings-and-revenue-history
KLSE:SWSCAP Earnings and Revenue History December 6th 2022

To understand the value of a company’s earnings growth, it is imperative to consider any dilution of shareholders’ interests. In fact, SWS Capital Berhad increased the number of shares on issue by 30% over the last twelve months by issuing new shares. As a result, its net income is now split between a greater number of shares. 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. You can see a chart of SWS Capital Berhad’s EPS by clicking here.

A Look At The Impact Of SWS Capital Berhad’s Dilution On Its Earnings Per Share (EPS)

Three years ago, SWS Capital Berhad lost money. And even focusing only on the last twelve months, we don’t have a meaningful growth rate because it made a loss a year ago, too. What we do know is that while it’s great to see a profit over the last twelve months, that profit would have been better, on a per share basis, if the company hadn’t needed to issue shares. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

If SWS Capital Berhad’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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of SWS Capital Berhad.

Our Take On SWS Capital Berhad’s Profit Performance

Over the last year SWS Capital Berhad issued new shares and so, there’s a noteworthy divergence between EPS and net income growth. Therefore, it seems possible to us that SWS Capital Berhad’s true underlying earnings power is actually less than its statutory profit. The good news is that it earned a profit in the last twelve months, despite its previous loss. At the end of the day, it’s essential to consider more than just the factors above, if you want to understand the company properly. So while earnings quality is important, it’s equally important to consider the risks facing SWS Capital Berhad at this point in time. Case in point: We’ve spotted 4 warning signs for SWS Capital Berhad you should be mindful of and 1 of them can’t be ignored.

This note has only looked at a single factor that sheds light on the nature of SWS Capital Berhad’s profit. 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. 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.

Valuation is complex, but we’re helping make it simple.

Find out whether SWS Capital Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

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.

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