Investors Shouldn't Be Too Comfortable With Tgi Infrastructures' (TLV:TGI) Earnings

Tgi Infrastructures Ltd (TLV:TGI) announced strong profits, but the stock was stagnant. Our analysis suggests that shareholders have noticed something concerning in the numbers.

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To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, Tgi Infrastructures increased the number of shares on issue by 6.0% over the last twelve months by issuing new shares. 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 Tgi Infrastructures' EPS by clicking here.

How Is Dilution Impacting Tgi Infrastructures' Earnings Per Share (EPS)?

Tgi Infrastructures has improved its profit over the last three years, with an annualized gain of 115% in that time. But EPS was only up 50% per year, in the exact same period. And at a glance the 58% gain in profit over the last year impresses. On the other hand, earnings per share are only up 56% in that time. So you can see that the dilution has had a bit of an impact on shareholders.

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 Tgi Infrastructures 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Tgi Infrastructures.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that Tgi Infrastructures' profit was boosted by unusual items worth ₪3.5m in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And, after all, that's exactly what the accounting terminology implies. If Tgi Infrastructures doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Tgi Infrastructures' Profit Performance

In its last report Tgi Infrastructures 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 Tgi Infrastructures' profits probably give an overly generous impression of its sustainable level of profitability. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. While conducting our analysis, we found that Tgi Infrastructures has 2 warning signs and it would be unwise to ignore them.

Our examination of Tgi Infrastructures has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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 with high insider ownership.

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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.