DRC Systems India's (NSE:DRCSYSTEMS) Shareholders May Want To Dig Deeper Than Statutory Profit

The recent earnings posted by DRC Systems India Limited (NSE:DRCSYSTEMS) were solid, but the stock didn't move as much as we expected. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

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To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. DRC Systems India expanded the number of shares on issue by 8.6% over the last year. 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. You can see a chart of DRC Systems India's EPS by clicking here.

How Is Dilution Impacting DRC Systems India's Earnings Per Share (EPS)?

As you can see above, DRC Systems India has been growing its net income over the last few years, with an annualized gain of 729% over three years. In comparison, earnings per share only gained 607% over the same period. And in the last year the company managed to bump profit up by 2.6%. Meanwhile, EPS was flat over the same period. 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 DRC Systems India shareholders will want to see that EPS figure continue to increase. 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 DRC Systems India.

Our Take On DRC Systems India's Profit Performance

Each DRC Systems India share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Because of this, we think that it may be that DRC Systems India's statutory profits are better than its underlying earnings power. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. While conducting our analysis, we found that DRC Systems India has 1 warning sign and it would be unwise to ignore it.

This note has only looked at a single factor that sheds light on the nature of DRC Systems India's 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.