Shemen Yielding Real Estate's (TLV:SMNR) Earnings Quality Is Low

Shemen Yielding Real Estate Ltd (TLV:SMNR) recently posted soft earnings but shareholders didn't react strongly. We did some analysis and found some concerning details beneath the statutory profit number.

Check out our latest analysis for Shemen Yielding Real Estate

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Shemen Yielding Real Estate increased the number of shares on issue by 69% over the last twelve months by issuing new shares. 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. Check out Shemen Yielding Real Estate's historical EPS growth by clicking on this link.

How Is Dilution Impacting Shemen Yielding Real Estate's Earnings Per Share (EPS)?

Three years ago, Shemen Yielding Real Estate lost money. Even looking at the last year, profit was still down 73%. Sadly, earnings per share fell further, down a full 81% in that time. So you can see that the dilution has had a fairly significant impact on shareholders.

In the long term, if Shemen Yielding Real Estate's earnings per share can increase, then the share price should too. 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shemen Yielding Real Estate.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted Shemen Yielding Real Estate's net profit by ₪27m over the last year. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. 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 that's as you'd expect, given these boosts are described as 'unusual'. Shemen Yielding Real Estate had a rather significant contribution from unusual items relative to its profit to December 2023. 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 Shemen Yielding Real Estate's Profit Performance

In its last report Shemen Yielding Real Estate 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. For all the reasons mentioned above, we think that, at a glance, Shemen Yielding Real Estate's statutory profits could be considered to be low quality, because they are likely to give investors an overly positive impression of the company. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Case in point: We've spotted 4 warning signs for Shemen Yielding Real Estate you should be mindful of and 1 of these shouldn't be ignored.

Our examination of Shemen Yielding Real Estate 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. 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.

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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.