First Sponsor Group (SGX:ADN) Is Growing Earnings But Are They A Good Guide?

By
Simply Wall St
Published
November 25, 2020
SGX:ADN

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. This article will consider whether First Sponsor Group's (SGX:ADN) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months First Sponsor Group made a profit of S$186.7m on revenue of S$314.0m. One positive is that it has grown both its profit and its revenue, over the last few years.

See our latest analysis for First Sponsor Group

earnings-and-revenue-history
SGX:ADN Earnings and Revenue History November 26th 2020

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. In this article we'll look at how First Sponsor Group is impacting shareholders by issuing new shares. 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.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. First Sponsor Group expanded the number of shares on issue by 15% 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 First Sponsor Group's historical EPS growth by clicking on this link.

How Is Dilution Impacting First Sponsor Group's Earnings Per Share? (EPS)

As you can see above, First Sponsor Group has been growing its net income over the last few years, with an annualized gain of 58% over three years. But EPS was only up 27% per year, in the exact same period. And the 47% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 31% in that time. So you can see that the dilution has had a bit of an impact on shareholders. Therefore, the dilution is having a noteworthy influence on shareholder returns. 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 it will certainly be a positive for shareholders if First Sponsor Group can grow EPS persistently. 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.

Our Take On First Sponsor Group's Profit Performance

First Sponsor Group shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Because of this, we think that it may be that First Sponsor Group's statutory profits are better than its underlying earnings power. Nonetheless, it's still worth noting that its earnings per share have grown at 27% over the last three years. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example - First Sponsor Group has 2 warning signs we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of First Sponsor Group'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. 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 that insiders are buying to be useful.

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This article by Simply Wall St is general in nature. 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.
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