Semler Scientific's (NASDAQ:SMLR) Profits May Not Reveal Underlying Issues

The recent earnings posted by Semler Scientific, Inc. (NASDAQ:SMLR) were solid, but the stock didn't move as much as we expected. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

Check out our latest analysis for Semler Scientific

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Semler Scientific expanded the number of shares on issue by 39% over the last year. Therefore, each share now receives a smaller portion of profit. 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 Semler Scientific's EPS by clicking here.

A Look At The Impact Of Semler Scientific's Dilution On Its Earnings Per Share (EPS)

As you can see above, Semler Scientific has been growing its net income over the last few years, with an annualized gain of 137% over three years. But EPS was only up 121% per year, in the exact same period. And the 99% profit boost in the last year certainly seems impressive at first glance. But in comparison, EPS only increased by 85% over the same period. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Semler Scientific shareholders will want to see that EPS figure continue to increase. 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Semler Scientific.

Our Take On Semler Scientific's Profit Performance

As we discussed above, Semler Scientific's dilution over the last year has a major impact on its per-share earnings. For this reason, we think that Semler Scientific's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you want to do dive deeper into Semler Scientific, you'd also look into what risks it is currently facing. For example, we've found that Semler Scientific has 2 warning signs (1 is concerning!) that deserve your attention before going any further with your analysis.

This note has only looked at a single factor that sheds light on the nature of Semler Scientific's 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.