Spectra Systems' (LON:SPSY) Weak Earnings May Only Reveal A Part Of The Whole Picture

A lackluster earnings announcement from Spectra Systems Corporation (LON:SPSY) last week didn't sink the stock price. We think that investors are worried about some weaknesses underlying the earnings.

See our latest analysis for Spectra Systems

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Spectra Systems issued 6.2% more new shares 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 Spectra Systems' EPS by clicking here.

A Look At The Impact Of Spectra Systems' Dilution On Its Earnings Per Share (EPS)

Spectra Systems has improved its profit over the last three years, with an annualized gain of 18% in that time. While we did see a very small decrease, net profit was basically flat over the last year. While EPS growth was also pretty flat, but no prizes for guessing that it looked worse than the net income. Therefore, the dilution is having a noteworthy influence on shareholder returns.

If Spectra Systems' 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 the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

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 Spectra Systems' Profit Performance

Spectra Systems 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 Spectra Systems' statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 19% per annum growth in EPS for the last three. 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 Spectra Systems at this point in time. Case in point: We've spotted 2 warning signs for Spectra Systems you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Spectra Systems' 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. 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.