Eltek's (NASDAQ:ELTK) Promising Earnings May Rest On Soft Foundations

Investors were disappointed with Eltek Ltd.'s (NASDAQ:ELTK) earnings, despite the strong profit numbers. Our analysis uncovered some concerning factors that we believe the market might be paying attention to.

See our latest analysis for Eltek

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Eltek issued 14% 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 Eltek's EPS by clicking here.

How Is Dilution Impacting Eltek's Earnings Per Share (EPS)?

As you can see above, Eltek has been growing its net income over the last few years, with an annualized gain of 144% over three years. But EPS was only up 86% per year, in the exact same period. And at a glance the 99% gain in profit over the last year impresses. But in comparison, EPS only increased by 97% over the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

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

Each Eltek share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Therefore, it seems possible to us that Eltek's true underlying earnings power is actually less than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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 while earnings quality is important, it's equally important to consider the risks facing Eltek at this point in time. While conducting our analysis, we found that Eltek has 4 warning signs and it would be unwise to ignore these.

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