National Agricultural Development's (TADAWUL:6010) Earnings Are Of Questionable Quality

Despite posting some strong earnings, the market for The National Agricultural Development Company's (TADAWUL:6010) stock hasn't moved much. Our analysis suggests that shareholders have noticed something concerning in the numbers.

View our latest analysis for National Agricultural Development

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, National Agricultural Development issued 197% more new shares over the last year. That means its earnings are split among a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out National Agricultural Development's historical EPS growth by clicking on this link.

How Is Dilution Impacting National Agricultural Development's Earnings Per Share (EPS)?

Three years ago, National Agricultural Development lost money. The good news is that profit was up 122% in the last twelve months. But EPS was far less impressive, dropping 30% in that time. This is a great example of why it's rather imprudent to rely only on net income as a growth measure. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

If National Agricultural Development's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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.

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.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that National Agricultural Development's profit suffered from unusual items, which reduced profit by ر.س62m in the last twelve months. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. If National Agricultural Development doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On National Agricultural Development's Profit Performance

National Agricultural Development suffered from unusual items which depressed its profit in its last report; if that is not repeated then profit should be higher, all else being equal. But on the other hand, the company issued more shares, so without buying more shares each shareholder will end up with a smaller part of the profit. Based on these factors, we think it's very unlikely that National Agricultural Development's statutory profits make it seem much weaker than it is. So while earnings quality is important, it's equally important to consider the risks facing National Agricultural Development at this point in time. Case in point: We've spotted 1 warning sign for National Agricultural Development you should be aware of.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.