Patel Engineering's (NSE:PATELENG) Solid Profits Have Weak Fundamentals

Patel Engineering Limited's (NSE:PATELENG) stock was strong after they recently reported robust earnings. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.

Check out our latest analysis for Patel Engineering

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, Patel Engineering issued 9.1% more new shares over the last year. That means its earnings are split among a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of Patel Engineering's EPS by clicking here.

A Look At The Impact Of Patel Engineering's Dilution On Its Earnings Per Share (EPS)

Patel Engineering was losing money three years ago. The good news is that profit was up 156% in the last twelve months. On the other hand, earnings per share are only up 73% over the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Patel Engineering can grow EPS persistently. 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.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted Patel Engineering's net profit by ₹503m over the last year. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. If Patel Engineering doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Patel Engineering's Profit Performance

To sum it all up, Patel Engineering got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. On top of that, the dilution means that its earnings per share performance is worse than its profit performance. For the reasons mentioned above, we think that a perfunctory glance at Patel Engineering's statutory profits might make it look better than it really is on an underlying level. If you'd like to know more about Patel Engineering as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 3 warning signs for Patel Engineering you should be mindful of and 1 of these makes us a bit uncomfortable.

Our examination of Patel Engineering has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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.