Solrom Holdings' (TLV:SLRM) Profits Appear To Have Quality Issues

Solrom Holdings Ltd's (TLV:SLRM) robust recent earnings didn't do much to move the stock. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.

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In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, Solrom Holdings issued 316% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. 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. You can see a chart of Solrom Holdings' EPS by clicking here.

How Is Dilution Impacting Solrom Holdings' Earnings Per Share (EPS)?

Solrom Holdings was losing money three years ago. On the bright side, in the last twelve months it grew profit by 3.2%. But earnings per share are actually down 6.9%, over that same period. This is a great example of why it's rather imprudent to rely only on net income as a growth measure. So you can see that the dilution has had a fairly significant impact on shareholders.

If Solrom Holdings' 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 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 Solrom Holdings.

Our Take On Solrom Holdings' Profit Performance

Solrom Holdings shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. As a result, we think it may well be the case that Solrom Holdings' underlying earnings power is lower than its statutory profit. In further bad news, its earnings per share decreased in the last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Case in point: We've spotted 4 warning signs for Solrom Holdings you should be mindful of and 2 of these are a bit concerning.

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

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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.