Action Construction Equipment (NSE:ACE) Strong Profits May Be Masking Some Underlying Issues

Action Construction Equipment Limited's (NSE:ACE) healthy profit numbers didn't contain any surprises for investors. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.

View our latest analysis for Action Construction Equipment

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Action Construction Equipment expanded the number of shares on issue by 8.3% over the last year. 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 Action Construction Equipment's historical EPS growth by clicking on this link.

How Is Dilution Impacting Action Construction Equipment's Earnings Per Share? (EPS)

As you can see above, Action Construction Equipment has been growing its net income over the last few years, with an annualized gain of 88% over three years. And at a glance the 32% gain in profit over the last year impresses. On the other hand, earnings per share are only up 28% 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 Action Construction Equipment shareholders will want to see that EPS figure continue to increase. 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.

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 Action Construction Equipment's Profit Performance

Action Construction Equipment 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 Action Construction Equipment's 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. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you want to do dive deeper into Action Construction Equipment, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 1 warning sign with Action Construction Equipment, and understanding this should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Action Construction Equipment's 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 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.