Why Jain Irrigation Systems' (NSE:JISLJALEQS) Earnings Are Weaker Than They Seem

By
Simply Wall St
Published
November 20, 2021
NSEI:JISLJALEQS
Source: Shutterstock

We didn't see Jain Irrigation Systems Limited's (NSE:JISLJALEQS) stock surge when it reported robust earnings recently. We think that investors might be worried about the foundations the earnings are built on.

Check out our latest analysis for Jain Irrigation Systems

earnings-and-revenue-history
NSEI:JISLJALEQS Earnings and Revenue History November 21st 2021

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Jain Irrigation Systems increased the number of shares on issue by 15% over the last twelve months by issuing new shares. 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. Check out Jain Irrigation Systems' historical EPS growth by clicking on this link.

A Look At The Impact Of Jain Irrigation Systems' Dilution on Its Earnings Per Share (EPS).

As it happens, we don't know how much the company made or lost three years ago, because we don't have the data. Zooming in to the last year, we still can't talk about growth rates coherently, since it made a loss last year. What we do know is that while it's great to see a profit over the last twelve months, that profit would have been better, on a per share basis, if the company hadn't needed to issue shares. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, if Jain Irrigation Systems' 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 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 Jain Irrigation Systems.

How Do Unusual Items Influence Profit?

Finally, we should also consider the fact that unusual items boosted Jain Irrigation Systems' net profit by ₹3.6b over the last year. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And, after all, that's exactly what the accounting terminology implies. Jain Irrigation Systems had a rather significant contribution from unusual items relative to its profit to September 2021. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Jain Irrigation Systems' Profit Performance

To sum it all up, Jain Irrigation Systems got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. And furthermore, it went and issued plenty of new shares, ensuring that each shareholder (who did not tip more money in) now owns a smaller proportion of the company. Considering all this we'd argue Jain Irrigation Systems' profits probably give an overly generous impression of its sustainable level of profitability. 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 4 warning signs for Jain Irrigation Systems (of which 1 is significant!) you should know about.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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 that insiders are buying.

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