Weak Statutory Earnings May Not Tell The Whole Story For HMS Networks (STO:HMS)

The subdued market reaction suggests that HMS Networks AB (publ)'s (STO:HMS) recent earnings didn't contain any surprises. We think that investors are worried about some weaknesses underlying the earnings.

View our latest analysis for HMS Networks

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, HMS Networks increased the number of shares on issue by 7.5% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. Check out HMS Networks' historical EPS growth by clicking on this link.

How Is Dilution Impacting HMS Networks' Earnings Per Share (EPS)?

As you can see above, HMS Networks has been growing its net income over the last few years, with an annualized gain of 40% over three years. Net income was down 26% over the last twelve months. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 27%. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, if HMS Networks' earnings per share can increase, then the share price should too. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. 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 HMS Networks' Profit Performance

Over the last year HMS Networks issued new shares and so, there's a noteworthy divergence between EPS and net income growth. Therefore, it seems possible to us that HMS Networks' true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 38% per annum growth in EPS for the last three. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you want to do dive deeper into HMS Networks, you'd also look into what risks it is currently facing. While conducting our analysis, we found that HMS Networks has 3 warning signs and it would be unwise to ignore these bad boys.

This note has only looked at a single factor that sheds light on the nature of HMS Networks' 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 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.

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