Solid Earnings May Not Tell The Whole Story For Ash-Sharqiyah Development (TADAWUL:6060)

Following the solid earnings report from Ash-Sharqiyah Development Co. (TADAWUL:6060), the market responded by bidding up the stock price. However, we think that shareholders should be cautious as we found some worrying factors underlying the profit.

View our latest analysis for Ash-Sharqiyah Development

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, Ash-Sharqiyah Development issued 300% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. 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 Ash-Sharqiyah Development's historical EPS growth by clicking on this link.

A Look At The Impact Of Ash-Sharqiyah Development's Dilution On Its Earnings Per Share (EPS)

Ash-Sharqiyah Development was losing money three years ago. And even focusing only on the last twelve months, we don't have a meaningful growth rate because it made a loss a year ago, too. But mathematics aside, it is always good to see when a formerly unprofitable business come good (though we accept profit would have been higher if dilution had not been required). So you can see that the dilution has had a fairly significant impact on shareholders.

If Ash-Sharqiyah 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Ash-Sharqiyah Development.

Our Take On Ash-Sharqiyah Development's Profit Performance

Ash-Sharqiyah Development issued shares during the year, and that means its EPS performance lags its net income growth. As a result, we think it may well be the case that Ash-Sharqiyah Development's underlying earnings power is lower than its statutory profit. On the bright side, the company showed enough improvement to book a profit this year, after losing money last year. 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. If you want to do dive deeper into Ash-Sharqiyah Development, you'd also look into what risks it is currently facing. Be aware that Ash-Sharqiyah Development is showing 2 warning signs in our investment analysis and 1 of those makes us a bit uncomfortable...

This note has only looked at a single factor that sheds light on the nature of Ash-Sharqiyah Development'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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.