We Think That There Are Some Issues For Aarti Surfactants (NSE:AARTISURF) Beyond Its Promising Earnings

The recent earnings posted by Aarti Surfactants Limited (NSE:AARTISURF) were solid, but the stock didn't move as much as we expected. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.

Check out our latest analysis for Aarti Surfactants

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Aarti Surfactants increased the number of shares on issue by 6.6% over the last twelve months by issuing new shares. As a result, its net income is now split between 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 Aarti Surfactants' historical EPS growth by clicking on this link.

How Is Dilution Impacting Aarti Surfactants' Earnings Per Share (EPS)?

As you can see above, Aarti Surfactants' net profit is roughly the same as what it was three years ago. Meanwhile EPS has dropped 6.6% per year over the same time frame. The profit growth of 68% in the last twelve months certainly seems very impressive. Then again, EPS was only up 60% over that period. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, earnings per share growth should beget share price growth. So Aarti Surfactants 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 Aarti Surfactants.

Our Take On Aarti Surfactants' Profit Performance

Aarti Surfactants shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Because of this, we think that it may be that Aarti Surfactants' statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 60% EPS growth in the last year. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. You'd be interested to know, that we found 3 warning signs for Aarti Surfactants and you'll want to know about them.

This note has only looked at a single factor that sheds light on the nature of Aarti Surfactants' 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.