RADA Electronic Industries' (NASDAQ:RADA) Promising Earnings May Rest On Soft Foundations

Despite posting some strong earnings, the market for RADA Electronic Industries Ltd.'s (NASDAQ:RADA) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

See our latest analysis for RADA Electronic Industries

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, RADA Electronic Industries issued 13% more new shares over the last year. As a result, its net income is now split between a greater number of shares. 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. You can see a chart of RADA Electronic Industries' EPS by clicking here.

A Look At The Impact Of RADA Electronic Industries' Dilution on Its Earnings Per Share (EPS).

We don't have any data on the company's profits from three years ago. The good news is that profit was up 172,427% in the last twelve months. But EPS was less impressive, up only 154,813% 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 RADA Electronic Industries 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.

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 RADA Electronic Industries' Profit Performance

Each RADA Electronic Industries share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Because of this, we think that it may be that RADA Electronic Industries' statutory profits are better than its underlying earnings power. The silver lining is that its EPS growth over the last year has been really wonderful, even if it's not a perfect measure. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. In terms of investment risks, we've identified 1 warning sign with RADA Electronic Industries, and understanding this should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of RADA Electronic Industries' profit. 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.
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