We Think You Should Be Aware Of Some Concerning Factors In Sumit Woods' (NSE:SUMIT) Earnings

Sumit Woods Limited's (NSE:SUMIT) healthy profit numbers didn't contain any surprises for investors. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.

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One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Sumit Woods expanded the number of shares on issue by 48% over the last year. As a result, its net income is now split between 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. You can see a chart of Sumit Woods' EPS by clicking here.

How Is Dilution Impacting Sumit Woods' Earnings Per Share (EPS)?

Sumit Woods has improved its profit over the last three years, with an annualized gain of 307% in that time. But EPS was only up 153% per year, in the exact same period. And over the last 12 months, the company grew its profit by 6.3%. But earnings per share are actually down 34%, over the last twelve months. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

In the long term, if Sumit Woods' earnings per share can increase, then the share price should too. 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 Sumit Woods.

Our Take On Sumit Woods' Profit Performance

Sumit Woods shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. For this reason, we think that Sumit Woods' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But the good news is that its EPS growth over the last three years has been very impressive. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. To that end, you should learn about the 2 warning signs we've spotted with Sumit Woods (including 1 which is concerning).

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