Ador Welding's (NSE:ADOR) Weak Earnings May Only Reveal A Part Of The Whole Picture

A lackluster earnings announcement from Ador Welding Limited (NSE:ADOR) last week didn't sink the stock price. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

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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. In fact, Ador Welding increased the number of shares on issue by 28% over the last twelve months by issuing new shares. That means its earnings are split among a greater number of shares. 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 Ador Welding's historical EPS growth by clicking on this link.

How Is Dilution Impacting Ador Welding's Earnings Per Share (EPS)?

As you can see above, Ador Welding has been growing its net income over the last few years, with an annualized gain of 33% over three years. In comparison, earnings per share only gained 4.2% over the same period. Net profit actually dropped by 5.0% in the last year. But the EPS result was even worse, with the company recording a decline of 26%. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

In the long term, if Ador Welding's 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.

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.

How Do Unusual Items Influence Profit?

On top of the dilution, we should also consider the ₹114m 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. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. 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 Ador Welding to produce a higher profit next year, all else being equal.

Our Take On Ador Welding's Profit Performance

Ador Welding 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 unfortunately the dilution means that shareholders now own a smaller proportion of the company (assuming they maintained the same number of shares). That will weigh on earnings per share, even if it is not reflected in net income. Having considered these factors, we don't think Ador Welding's statutory profits give an overly harsh view of the business. If you want to do dive deeper into Ador Welding, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 2 warning signs for Ador Welding you should know about.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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.