A lackluster earnings announcement from PC Jeweller Limited (NSE:PCJEWELLER) last week didn’t sink the stock price. However, we believe that investors should be aware of some underlying factors which may be of concern.
To understand the value of a company’s earnings growth, it is imperative to consider any dilution of shareholders’ interests. PC Jeweller expanded the number of shares on issue by 18% over the last year. As a result, its net income is now split between a greater number of shares. 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. Check out PC Jeweller’s historical EPS growth by clicking on this link.
How Is Dilution Impacting PC Jeweller’s Earnings Per Share? (EPS)
We don’t have any data on the company’s profits from three years ago. Even looking at the last year, profit was still down 25%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 27% in the same period. So you can see that the dilution has had a bit of an impact on shareholders.
In the long term, if PC Jeweller’s earnings per share can increase, then the share price should too. 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.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of PC Jeweller.
Our Take On PC Jeweller’s Profit Performance
Over the last year PC Jeweller issued new shares and so, there’s a noteworthy divergence between EPS and net income growth. Therefore, it seems possible to us that PC Jeweller’s true underlying earnings power is actually less than its statutory profit. Sadly, its EPS was down over the last twelve months. 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. Keep in mind, when it comes to analysing a stock it’s worth noting the risks involved. Case in point: We’ve spotted 4 warning signs for PC Jeweller you should be mindful of and 2 of these bad boys are a bit concerning.
This note has only looked at a single factor that sheds light on the nature of PC Jeweller’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 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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