Investors Shouldn't Be Too Comfortable With Soilbuild Construction Group's (SGX:V5Q) Earnings

Soilbuild Construction Group Ltd.'s (SGX:V5Q) stock was strong after they recently reported robust earnings. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.

View our latest analysis for Soilbuild Construction Group

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Soilbuild Construction Group increased the number of shares on issue by 12% over the last twelve months by issuing new shares. 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. You can see a chart of Soilbuild Construction Group's EPS by clicking here.

A Look At The Impact Of Soilbuild Construction Group's Dilution On Its Earnings Per Share (EPS)

Soilbuild Construction Group was losing money three years ago. The good news is that profit was up 263% in the last twelve months. But EPS was less impressive, up only 208% in that time. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, earnings per share growth should beget share price growth. So Soilbuild Construction Group shareholders will want to see that EPS figure continue to increase. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. 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 Soilbuild Construction Group.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that Soilbuild Construction Group's profit suffered from unusual items, which reduced profit by S$4.3m 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 Soilbuild Construction Group 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 Soilbuild Construction Group's Profit Performance

To sum it all up, Soilbuild Construction Group took a hit from unusual items which pushed its profit down; without that, it would have made more money. 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, it's hard to tell if Soilbuild Construction Group's profits are a reasonable reflection of its underlying profitability. So while earnings quality is important, it's equally important to consider the risks facing Soilbuild Construction Group at this point in time. Every company has risks, and we've spotted 1 warning sign for Soilbuild Construction Group you should know about.

Our examination of Soilbuild Construction Group has focussed on certain factors that can make its earnings look better than they are. 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.