SMS Pharmaceuticals' (NSE:SMSPHARMA) Solid Profits Have Weak Fundamentals

Despite posting some strong earnings, the market for SMS Pharmaceuticals Limited's (NSE:SMSPHARMA) stock hasn't moved much. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, SMS Pharmaceuticals increased the number of shares on issue by 11% over the last twelve months by issuing new shares. That means its earnings are split among 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 SMS Pharmaceuticals' historical EPS growth by clicking on this link.

How Is Dilution Impacting SMS Pharmaceuticals' Earnings Per Share (EPS)?

SMS Pharmaceuticals has improved its profit over the last three years, with an annualized gain of 9,772% in that time. In comparison, earnings per share only gained 9,075% over the same period. And the 42% 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.

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 SMS Pharmaceuticals 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 SMS Pharmaceuticals.

Our Take On SMS Pharmaceuticals' Profit Performance

SMS Pharmaceuticals 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 SMS Pharmaceuticals' 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. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. Just as investors must consider earnings, it is also important to take into account the strength of a company's balance sheet. You can see our latest analysis on SMS Pharmaceuticals' balance sheet health here.

Today we've zoomed in on a single data point to better understand the nature of SMS Pharmaceuticals' 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.

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.