Should You Use Pennar Industries's (NSE:PENIND) Statutory Earnings To Analyse It?

As a general rule, we think profitable companies are less risky than companies that lose money. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether Pennar Industries' (NSE:PENIND) statutory profits are a good guide to its underlying earnings.

We like the fact that Pennar Industries made a profit of ₹530.5m on its revenue of ₹21.1b, in the last year. Happily, it has grown both its profit and revenue over the last three years (though we note its profit is down over the last year).

Check out our latest analysis for Pennar Industries

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 Pennar Industries is impacting shareholders by issuing new shares. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Pennar Industries.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Pennar Industries expanded the number of shares on issue by 18% over the last year. Therefore, each share now receives a smaller portion of profit. 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. You can see a chart of Pennar Industries' EPS by clicking here.

How Is Dilution Impacting Pennar Industries' Earnings Per Share? (EPS)

Pennar Industries has improved its profit over the last three years, with an annualized gain of 53% in that time. But EPS was only up 22% per year, in the exact same period. Net income was down 20% over the last twelve months. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 20%. 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 returns. And so, you can see quite clearly that dilution is influencing shareholder earnings.

If Pennar Industries' 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.

Our Take On Pennar Industries' Profit Performance

Pennar Industries issued shares during the year, and that means its EPS performance lags its net income growth. Therefore, it seems possible to us that Pennar Industries' true underlying earnings power is actually less than its statutory profit. Nonetheless, it's still worth noting that its earnings per share have grown at 22% over the last three years. 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. If you want to do dive deeper into Pennar Industries, you'd also look into what risks it is currently facing. For example, we've found that Pennar Industries has 4 warning signs (1 can't be ignored!) that deserve your attention before going any further with your analysis.

Today we've zoomed in on a single data point to better understand the nature of Pennar Industries' 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.

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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. 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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