HFCL's (NSE:HFCL) Promising Earnings May Rest On Soft Foundations

Despite posting some strong earnings, the market for HFCL Limited's (NSE:HFCL) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

Check out our latest analysis for HFCL

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, HFCL increased the number of shares on issue by 7.0% over the last twelve months by issuing new shares. 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 HFCL's EPS by clicking here.

A Look At The Impact Of HFCL's Dilution on Its Earnings Per Share (EPS).

As you can see above, HFCL has been growing its net income over the last few years, with an annualized gain of 42% over three years. And at a glance the 31% gain in profit over the last year impresses. But in comparison, EPS only increased by 28% over the same period. 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 HFCL can grow EPS persistently. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. 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 HFCL.

Our Take On HFCL's Profit Performance

Each HFCL 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 HFCL's statutory profits are better than its underlying earnings power. Nonetheless, it's still worth noting that its earnings per share have grown at 34% 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. So while earnings quality is important, it's equally important to consider the risks facing HFCL at this point in time. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of HFCL.

Today we've zoomed in on a single data point to better understand the nature of HFCL's profit. But there are plenty of other ways to inform your opinion of a company. 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 that insiders are buying 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.