Mangalam Worldwide's (NSE:MWL) Earnings Are Of Questionable Quality

Unsurprisingly, Mangalam Worldwide Limited's (NSE:MWL) stock price was strong on the back of its healthy earnings report. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.

Check out our latest analysis for Mangalam Worldwide

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Mangalam Worldwide issued 6.1% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. You can see a chart of Mangalam Worldwide's EPS by clicking here.

A Look At The Impact Of Mangalam Worldwide's Dilution On Its Earnings Per Share (EPS)

As you can see above, Mangalam Worldwide has been growing its net income over the last few years, with an annualized gain of 292% over three years. But EPS was only up 97% per year, in the exact same period. And at a glance the 82% gain in profit over the last year impresses. On the other hand, earnings per share are only up 76% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if Mangalam Worldwide 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 Mangalam Worldwide.

Our Take On Mangalam Worldwide's Profit Performance

Each Mangalam Worldwide share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Therefore, it seems possible to us that Mangalam Worldwide's true underlying earnings power is actually less than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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 while earnings quality is important, it's equally important to consider the risks facing Mangalam Worldwide at this point in time. Every company has risks, and we've spotted 4 warning signs for Mangalam Worldwide (of which 1 is a bit unpleasant!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Mangalam Worldwide'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. 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.