First Sponsor Group's (SGX:ADN) Sluggish Earnings Might Be Just The Beginning Of Its Problems

A lackluster earnings announcement from First Sponsor Group Limited (SGX:ADN) last week didn't sink the stock price. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

See our latest analysis for First Sponsor Group

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, First Sponsor Group increased the number of shares on issue by 20% over the last twelve months by issuing new shares. 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. You can see a chart of First Sponsor Group's EPS by clicking here.

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

Unfortunately, First Sponsor Group's profit is down 88% per year over three years. Even looking at the last year, profit was still down 90%. Sadly, earnings per share fell further, down a full 91% in that time. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, if First Sponsor Group's earnings per share can increase, then the share price should too. 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 First Sponsor Group.

How Do Unusual Items Influence Profit?

Finally, we should also consider the fact that unusual items boosted First Sponsor Group's net profit by S$3.9m over the last year. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On First Sponsor Group's Profit Performance

In its last report First Sponsor Group benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. On top of that, the dilution means that its earnings per share performance is worse than its profit performance. Considering all this we'd argue First Sponsor Group's profits probably give an overly generous impression of its sustainable level of profitability. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. To that end, you should learn about the 6 warning signs we've spotted with First Sponsor Group (including 4 which are concerning).

Our examination of First Sponsor Group has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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 that insiders are buying.

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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.