Gulf Navigation Holding PJSC's (DFM:GULFNAV) Earnings Are Built On Soft Foundations

Shareholders didn't seem to be thrilled with Gulf Navigation Holding PJSC's (DFM:GULFNAV) recent earnings report, despite healthy profit numbers. Our analysis has found some concerning factors which weaken the profit's foundation.

See our latest analysis for Gulf Navigation Holding PJSC

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Gulf Navigation Holding PJSC issued 30% more new shares over the last year. That means its earnings are split among a greater number of shares. 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. Check out Gulf Navigation Holding PJSC's historical EPS growth by clicking on this link.

A Look At The Impact Of Gulf Navigation Holding PJSC's Dilution On Its Earnings Per Share (EPS)

Three years ago, Gulf Navigation Holding PJSC lost money. Zooming in to the last year, we still can't talk about growth rates coherently, since it made a loss last year. 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 Gulf Navigation Holding PJSC'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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Gulf Navigation Holding PJSC.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted Gulf Navigation Holding PJSC's net profit by د.إ57m 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. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. Gulf Navigation Holding PJSC had a rather significant contribution from unusual items relative to its profit to December 2023. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Gulf Navigation Holding PJSC's Profit Performance

In its last report Gulf Navigation Holding PJSC 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. Considering all this we'd argue Gulf Navigation Holding PJSC's profits probably give an overly generous impression of its sustainable level of profitability. So while earnings quality is important, it's equally important to consider the risks facing Gulf Navigation Holding PJSC at this point in time. In terms of investment risks, we've identified 2 warning signs with Gulf Navigation Holding PJSC, and understanding these should be part of your investment process.

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 is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.