We Think That There Are More Issues For Adatex (WSE:ADX) Than Just Sluggish Earnings

A lackluster earnings announcement from Adatex S.A. (WSE:ADX) last week didn't sink the stock price. We think that investors are worried about some weaknesses underlying the earnings.

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One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Adatex expanded the number of shares on issue by 14% over the last year. Therefore, each share now receives a smaller portion of profit. 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 Adatex's historical EPS growth by clicking on this link.

How Is Dilution Impacting Adatex's Earnings Per Share (EPS)?

Three years ago, Adatex lost money. And even focusing only on the last twelve months, we see profit is down 2.5%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 26% in the same period. And so, you can see quite clearly that dilution is influencing shareholder earnings.

If Adatex'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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Adatex.

Our Take On Adatex's Profit Performance

Over the last year Adatex issued new shares and so, there's a noteworthy divergence between EPS and net income growth. Because of this, we think that it may be that Adatex's statutory profits are better than its underlying earnings power. Sadly, its EPS was down over the last twelve months. 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 Adatex at this point in time. Case in point: We've spotted 3 warning signs for Adatex you should be mindful of and 1 of these bad boys is a bit concerning.

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