Solid Earnings May Not Tell The Whole Story For Rama Steel Tubes (NSE:RAMASTEEL)

Rama Steel Tubes Limited's (NSE:RAMASTEEL) healthy profit numbers didn't contain any surprises for investors. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

See our latest analysis for Rama Steel Tubes

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Rama Steel Tubes expanded the number of shares on issue by 11% over the last year. As a result, its net income is now split between a greater number of shares. 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 Rama Steel Tubes' EPS by clicking here.

A Look At The Impact Of Rama Steel Tubes' Dilution On Its Earnings Per Share (EPS)

Rama Steel Tubes has improved its profit over the last three years, with an annualized gain of 135% in that time. And in the last year the company managed to bump profit up by 9.2%. On the other hand, earnings per share are only up 28% in that time. So you can see that the dilution has had a bit of an 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 Rama Steel Tubes can grow EPS persistently. 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 Rama Steel Tubes.

Our Take On Rama Steel Tubes' Profit Performance

Rama Steel Tubes 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 Rama Steel Tubes' 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. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Every company has risks, and we've spotted 2 warning signs for Rama Steel Tubes (of which 1 can't be ignored!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of Rama Steel Tubes' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.

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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.