We Think That There Are Some Issues For Sarveshwar Foods (NSE:SARVESHWAR) Beyond Its Promising Earnings

Sarveshwar Foods Limited's (NSE:SARVESHWAR) healthy profit numbers didn't contain any surprises for investors. However the statutory profit number doesn't tell the whole story, and we have found some factors which might be of concern to shareholders.

See our latest analysis for Sarveshwar Foods

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Sarveshwar Foods increased the number of shares on issue by 33% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out Sarveshwar Foods' historical EPS growth by clicking on this link.

A Look At The Impact Of Sarveshwar Foods' Dilution On Its Earnings Per Share (EPS)

Sarveshwar Foods has improved its profit over the last three years, with an annualized gain of 290% in that time. In comparison, earnings per share only gained 225% over the same period. And at a glance the 114% gain in profit over the last year impresses. But in comparison, EPS only increased by 79% over the same period. So you can see that the dilution has had a fairly significant impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Sarveshwar Foods 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 Sarveshwar Foods.

Our Take On Sarveshwar Foods' Profit Performance

As we discussed above, Sarveshwar Foods' dilution over the last year has a major impact on its per-share earnings. For this reason, we think that Sarveshwar Foods' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Every company has risks, and we've spotted 4 warning signs for Sarveshwar Foods (of which 2 don't sit too well with us!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Sarveshwar Foods' profit. 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. 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.