Earnings Troubles May Signal Larger Issues for Abra Information Technologies (TLV:ABRA) Shareholders

Investors weren't pleased with the recent soft earnings report from Abra Information Technologies Ltd. (TLV:ABRA). We did some digging and think there are some comforting factors lying beneath the statutory profit 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. Abra Information Technologies expanded the number of shares on issue by 13% 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 Abra Information Technologies' historical EPS growth by clicking on this link.

A Look At The Impact Of Abra Information Technologies' Dilution On Its Earnings Per Share (EPS)

Abra Information Technologies has improved its profit over the last three years, with an annualized gain of 16% in that time. In contrast, earnings per share were actually down by 31% per year, in the exact same period. Net profit actually dropped by 5.7% in the last year. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 27%. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, if Abra Information Technologies' earnings per share can increase, then the share price should too. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. 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 Abra Information Technologies.

The Impact Of Unusual Items On Profit

On top of the dilution, we should also consider the ₪2.9m impact of unusual items in the last year, which had the effect of suppressing profit. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Abra Information Technologies to produce a higher profit next year, all else being equal.

Our Take On Abra Information Technologies' Profit Performance

Abra Information Technologies suffered from unusual items which depressed its profit in its last report; if that is not repeated then profit should be higher, all else being equal. But on the other hand, the company issued more shares, so without buying more shares each shareholder will end up with a smaller part of the profit. Given the contrasting considerations, we don't have a strong view as to whether Abra Information Technologies's profits are an apt reflection of its underlying potential for profit. So while earnings quality is important, it's equally important to consider the risks facing Abra Information Technologies at this point in time. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of Abra Information Technologies.

Our examination of Abra Information Technologies has focussed on certain factors that can make its earnings look better than they are. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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.