First Sponsor Group’s (SGX:ADN) Earnings Are Growing But Is There More To The Story?

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. That said, the current statutory profit is not always a good guide to a company’s underlying profitability. Today we’ll focus on whether this year’s statutory profits are a good guide to understanding First Sponsor Group (SGX:ADN).

It’s good to see that over the last twelve months First Sponsor Group made a profit of S$126.8m on revenue of S$301.3m. In the chart below, you can see that its profit and revenue have both grown over the last three years, although its revenue has slipped in the last twelve months.

See our latest analysis for First Sponsor Group

SGX:ADN Income Statement, February 8th 2020
SGX:ADN Income Statement, February 8th 2020

Importantly, statutory profits are not always the best tool for understanding a company’s true earnings power, so it’s well worth examining profits in a little more detail. In this article we’ll look at how First Sponsor Group is impacting shareholders by issuing new shares. 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.

To understand the value of a company’s earnings growth, it is imperative to consider any dilution of shareholders’ interests. First Sponsor Group expanded the number of shares on issue by 11% over the last year. Therefore, each share now receives a smaller portion of profit. 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 First Sponsor Group’s EPS by clicking here.

How Is Dilution Impacting First Sponsor Group’s Earnings Per Share? (EPS)

As you can see above, First Sponsor Group has been growing its net income over the last few years, with an annualized gain of 76% over three years. But EPS was only up 59% per year, in the exact same period. And at a glance the 34% gain in profit over the last year impresses. But in comparison, EPS only increased by 21% over the same period. So you can see that the dilution has had a bit of an impact on shareholders.Therefore, the dilution is having a noteworthy influence on shareholder returnsAnd so, you can see quite clearly that dilution is influencing shareholder earnings.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if First Sponsor Group can grow EPS persistently. 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.

Our Take On First Sponsor Group’s Profit Performance

Each First Sponsor Group share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Therefore, it seems possible to us that First Sponsor Group’s true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 59% per annum growth in EPS for the last three. 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. Ultimately, this article has formed an opinion based on historical data. However, it can also be great to think about what analysts are forecasting for the future. So feel free to check out our free graph representing analyst forecasts.

Today we’ve zoomed in on a single data point to better understand the nature of First Sponsor Group’s profit. 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. 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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.