HEC Infra Projects' (NSE:HECPROJECT) Promising Earnings May Rest On Soft Foundations

Despite posting some strong earnings, the market for HEC Infra Projects Limited's (NSE:HECPROJECT) stock hasn't moved much. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

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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, HEC Infra Projects issued 6.9% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. 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 HEC Infra Projects' EPS by clicking here.

A Look At The Impact Of HEC Infra Projects' Dilution On Its Earnings Per Share (EPS)

As you can see above, HEC Infra Projects has been growing its net income over the last few years, with an annualized gain of 1,713% over three years. In comparison, earnings per share only gained 1,653% over the same period. And the 76% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 70% 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 it will certainly be a positive for shareholders if HEC Infra Projects can grow EPS persistently. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of HEC Infra Projects.

Our Take On HEC Infra Projects' Profit Performance

HEC Infra Projects 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 HEC Infra Projects' true underlying earnings power is actually less than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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. So while earnings quality is important, it's equally important to consider the risks facing HEC Infra Projects at this point in time. For example, HEC Infra Projects has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

This note has only looked at a single factor that sheds light on the nature of HEC Infra Projects' profit. But there are plenty of other ways to inform your opinion of a company. 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. 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.