Weak Statutory Earnings May Not Tell The Whole Story For Rushil Décor (NSE:RUSHIL)

The subdued market reaction suggests that Rushil Décor Limited's (NSE:RUSHIL) recent earnings didn't contain any surprises. We think that investors are worried about some weaknesses underlying the earnings.

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To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Rushil Décor expanded the number of shares on issue by 6.7% 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. Check out Rushil Décor's historical EPS growth by clicking on this link.

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

Rushil Décor's net profit dropped by 80% per year over the last three years. Even looking at the last year, profit was still down 65%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 66% in the same period. So you can see that the dilution has had a bit of an impact on shareholders.

If Rushil Décor's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Rushil Décor.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that Rushil Décor's profit was boosted by unusual items worth ₹39m in the last twelve months. 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. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Rushil Décor's Profit Performance

In its last report Rushil Décor benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. 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 Rushil Décor's statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into Rushil Décor, you'd also look into what risks it is currently facing. Case in point: We've spotted 6 warning signs for Rushil Décor you should be mindful of and 1 of them makes us a bit uncomfortable.

Our examination of Rushil Décor 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 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.