Investors Shouldn't Be Too Comfortable With JK Tyre & Industries' (NSE:JKTYRE) Earnings

JK Tyre & Industries Limited (NSE:JKTYRE) announced strong profits, but the stock was stagnant. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

Check out our latest analysis for JK Tyre & Industries

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, JK Tyre & Industries issued 5.9% more new shares over the last year. That means its earnings are split among a greater number of shares. 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 JK Tyre & Industries' EPS by clicking here.

A Look At The Impact Of JK Tyre & Industries' Dilution On Its Earnings Per Share (EPS)

JK Tyre & Industries has improved its profit over the last three years, with an annualized gain of 146% in that time. In comparison, earnings per share only gained 130% over the same period. And at a glance the 200% gain in profit over the last year impresses. On the other hand, earnings per share are only up 180% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.

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 JK Tyre & Industries 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 the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On JK Tyre & Industries' Profit Performance

JK Tyre & Industries shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Therefore, it seems possible to us that JK Tyre & Industries' true underlying earnings power is actually less than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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. 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. Every company has risks, and we've spotted 3 warning signs for JK Tyre & Industries you should know about.

This note has only looked at a single factor that sheds light on the nature of JK Tyre & Industries' profit. 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. 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.