We Think That There Are Some Issues For United Polyfab Gujarat (NSE:UNITEDPOLY) Beyond Its Promising Earnings

The market for United Polyfab Gujarat Limited's (NSE:UNITEDPOLY) stock was strong after it released a healthy earnings report last week. Despite this, our analysis suggests that there are some factors weakening the foundations of those good profit numbers.

View our latest analysis for United Polyfab Gujarat

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, United Polyfab Gujarat issued 9.5% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. 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 United Polyfab Gujarat's EPS by clicking here.

A Look At The Impact Of United Polyfab Gujarat's Dilution On Its Earnings Per Share (EPS)

United Polyfab Gujarat has improved its profit over the last three years, with an annualized gain of 14% in that time. And at a glance the 34% gain in profit over the last year impresses. On the other hand, earnings per share are only up 25% in that time. 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 United Polyfab Gujarat 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of United Polyfab Gujarat.

Our Take On United Polyfab Gujarat's Profit Performance

United Polyfab Gujarat 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 United Polyfab Gujarat's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 5.5% per annum growth in EPS for the last three. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. When we did our research, we found 4 warning signs for United Polyfab Gujarat (1 doesn't sit too well with us!) that we believe deserve your full attention.

Today we've zoomed in on a single data point to better understand the nature of United Polyfab Gujarat'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. 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.