Earnings Troubles May Signal Larger Issues for JSW Energy (NSE:JSWENERGY) Shareholders

The market rallied behind JSW Energy Limited's (NSE:JSWENERGY) stock, leading do a rise in the share price after its recent weak earnings report. We think that shareholders might be missing some concerning factors that our analysis found.

See our latest analysis for JSW Energy

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. JSW Energy expanded the number of shares on issue by 6.3% over the last year. 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. Check out JSW Energy's historical EPS growth by clicking on this link.

A Look At The Impact Of JSW Energy's Dilution On Its Earnings Per Share (EPS)

JSW Energy has improved its profit over the last three years, with an annualized gain of 106% in that time. Net income was down 21% over the last twelve months. But the EPS result was even worse, with the company recording a decline of 20%. So you can see that the dilution has had a bit of an impact on shareholders.

If JSW Energy's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On JSW Energy's Profit Performance

JSW Energy issued shares during the year, and that means its EPS performance lags its net income growth. Because of this, we think that it may be that JSW Energy's 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. 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. So while earnings quality is important, it's equally important to consider the risks facing JSW Energy at this point in time. When we did our research, we found 3 warning signs for JSW Energy (1 is a bit unpleasant!) that we believe deserve your full attention.

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