Marathon Nextgen Realty (NSE:MARATHON) Posted Healthy Earnings But There Are Some Other Factors To Be Aware Of

Last week's profit announcement from Marathon Nextgen Realty Limited (NSE:MARATHON) was underwhelming for investors, despite headline numbers being robust. We did some digging and found some worrying underlying problems.

See our latest analysis for Marathon Nextgen Realty

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Marathon Nextgen Realty expanded the number of shares on issue by 10% over the last year. That means its earnings are split among 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. Check out Marathon Nextgen Realty's historical EPS growth by clicking on this link.

How Is Dilution Impacting Marathon Nextgen Realty's Earnings Per Share (EPS)?

Marathon Nextgen Realty has improved its profit over the last three years, with an annualized gain of 996% in that time. But EPS was only up 943% per year, in the exact same period. And the 38% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 32% in that time. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Marathon Nextgen Realty 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 Marathon Nextgen Realty.

The Power Of Non-Operating Revenue

At most companies, some revenue streams, such as government grants, are accounted for as non-operating revenue, while the core business is said to produce operating revenue. Generally speaking, operating revenue is a more reliable guide to the sustainable revenue generating capacity of the business. However, we note that when non-operating revenue increases suddenly, it will sometimes generate an unsustainable boost to profit. Alongside the dilution mentioned above, we think shareholders should note that Marathon Nextgen Realty had a significant increase in non-operating revenue over the last year. Indeed, its non-operating revenue rose from ₹2.68m last year to ₹412.2m this year. If that non-operating revenue fails to manifest in the current year, then there's a real risk the bottom line profit result will be impacted negatively. In order to better understand a company's profit result, it can sometimes help to consider whether the result would be very different without a sudden increase in non-operating revenue.

Our Take On Marathon Nextgen Realty's Profit Performance

In the last year Marathon Nextgen Realty's non-operating revenue really gave it a boost, but not in a way that is necessarily going to be sustained. And due to the dilution, its EPS growth is lagging profit growth, anyway. For the reasons mentioned above, we think that a perfunctory glance at Marathon Nextgen Realty's statutory profits might make it look better than it really is on an underlying level. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example, Marathon Nextgen Realty has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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.