Inrom Construction Industries' (TLV:INRM) Earnings Are Built On Soft Foundations

Following the release of a positive earnings report recently, Inrom Construction Industries Ltd's (TLV:INRM) stock performed well. Investors should be cautious however, as there some causes of concern deeper in the numbers.

See our latest analysis for Inrom Construction Industries

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Inrom Construction Industries issued 17% more new shares over the last year. That means its earnings are split among a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. Check out Inrom Construction Industries' historical EPS growth by clicking on this link.

A Look At The Impact Of Inrom Construction Industries' Dilution On Its Earnings Per Share (EPS)

Inrom Construction Industries has improved its profit over the last three years, with an annualized gain of 72% in that time. In comparison, earnings per share only gained 38% over the same period. And the 29% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 14% in that time. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, earnings per share growth should beget share price growth. So Inrom Construction Industries shareholders will want to see that EPS figure continue to increase. 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 Inrom Construction Industries.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that Inrom Construction Industries' profit was boosted by unusual items worth ₪60m 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 analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. We can see that Inrom Construction Industries' positive unusual items were quite significant relative to its profit in the year to September 2024. 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 Inrom Construction Industries' Profit Performance

To sum it all up, Inrom Construction Industries got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. 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. For the reasons mentioned above, we think that a perfunctory glance at Inrom Construction Industries' statutory profits might make it look better than it really is on an underlying level. So while earnings quality is important, it's equally important to consider the risks facing Inrom Construction Industries at this point in time. At Simply Wall St, we found 2 warning signs for Inrom Construction Industries and we think they deserve your attention.

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 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 with significant insider holdings to be useful.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.