Additional Considerations Required While Assessing Skipper's (NSE:SKIPPER) Strong Earnings

Investors were disappointed with Skipper Limited's (NSE:SKIPPER) earnings, despite the strong profit numbers. We think that the market might be paying attention to some underlying factors that they find to be concerning.

Check out our latest analysis for Skipper

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Skipper issued 10.0% more new shares over the last year. As a result, its net income is now split between a greater number of shares. 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 Skipper's historical EPS growth by clicking on this link.

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

Skipper has improved its profit over the last three years, with an annualized gain of 281% in that time. But EPS was only up 267% per year, in the exact same period. And the 130% profit boost in the last year certainly seems impressive at first glance. But in comparison, EPS only increased by 121% over the same period. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So Skipper shareholders will want to see that EPS figure continue to increase. 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 Skipper.

Our Take On Skipper's Profit Performance

Each Skipper share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Therefore, it seems possible to us that Skipper's true underlying earnings power is actually less than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing Skipper at this point in time. Every company has risks, and we've spotted 3 warning signs for Skipper (of which 1 is potentially serious!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of Skipper's 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. 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.