Analog Devices' (NASDAQ:ADI) Earnings Are Weaker Than They Seem

Despite posting some strong earnings, the market for Analog Devices, Inc.'s (NASDAQ:ADI) stock hasn't moved much. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

See our latest analysis for Analog Devices

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Analog Devices issued 46% more new shares over the last year. That means its earnings are split among 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 Analog Devices' EPS by clicking here.

A Look At The Impact Of Analog Devices' Dilution on Its Earnings Per Share (EPS).

As you can see above, Analog Devices has been growing its net income over the last few years, with an annualized gain of 19% over three years. And at a glance the 53% gain in profit over the last year impresses. But in comparison, EPS only increased by 53% over the same period. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So Analog Devices 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 Analog Devices' Profit Performance

Analog Devices shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. As a result, we think it may well be the case that Analog Devices' underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 19% per annum growth in EPS for the last three. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example, we've discovered 2 warning signs that you should run your eye over to get a better picture of Analog Devices.

Today we've zoomed in on a single data point to better understand the nature of Analog Devices' 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. 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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