Himadri Speciality Chemical's (NSE:HSCL) Solid Profits Have Weak Fundamentals

Despite announcing strong earnings, Himadri Speciality Chemical Limited's (NSE:HSCL) stock was sluggish. We did some digging and found some worrying underlying problems.

View our latest analysis for Himadri Speciality Chemical

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Himadri Speciality Chemical issued 12% more new shares over the last year. 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 Himadri Speciality Chemical's historical EPS growth by clicking on this link.

How Is Dilution Impacting Himadri Speciality Chemical's Earnings Per Share (EPS)?

Himadri Speciality Chemical has improved its profit over the last three years, with an annualized gain of 662% in that time. In comparison, earnings per share only gained 562% over the same period. And the 47% profit boost in the last year certainly seems impressive at first glance. But in comparison, EPS only increased by 32% over the same period. 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 Himadri Speciality Chemical shareholders will want to see that EPS figure continue to increase. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Himadri Speciality Chemical.

Our Take On Himadri Speciality Chemical's Profit Performance

Each Himadri Speciality Chemical share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Because of this, we think that it may be that Himadri Speciality Chemical's statutory profits are better than its underlying earnings power. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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 1 warning sign for Himadri Speciality Chemical you should know about.

This note has only looked at a single factor that sheds light on the nature of Himadri Speciality Chemical's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.