Why GHCL's (NSE:GHCL) Shaky Earnings Are Just The Beginning Of Its Problems

GHCL Limited's (NSE:GHCL) stock showed strength, with investors undeterred by its weak earnings report. We think that shareholders might be missing some concerning factors that our analysis found.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. GHCL expanded the number of shares on issue by 7.0% over the last year. That means its earnings are split among a greater number of shares. 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 GHCL's historical EPS growth by clicking on this link.

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

As you can see above, GHCL has been growing its net income over the last few years, with an annualized gain of 40% over three years. Net profit actually dropped by 21% in the last year. But the EPS result was even worse, with the company recording a decline of 21%. Therefore, the dilution is having a noteworthy influence on shareholder returns.

If GHCL's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On GHCL's Profit Performance

Over the last year GHCL issued new shares and so, there's a noteworthy divergence between EPS and net income growth. Therefore, it seems possible to us that GHCL's true underlying earnings power is actually less than its statutory profit. Nonetheless, it's still worth noting that its earnings per share have grown at 40% over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. You'd be interested to know, that we found 1 warning sign for GHCL and you'll want to know about this.

Today we've zoomed in on a single data point to better understand the nature of GHCL's 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 with significant insider holdings to be useful.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.