Mahindra & Mahindra's (NSE:M&M) Earnings Are Weaker Than They Seem
Mahindra & Mahindra Limited (NSE:M&M) just reported some strong earnings, and the market reacted accordingly with a healthy uplift in the share price. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Mahindra & Mahindra issued 7.6% more new shares over the last year. That means its earnings are split among a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out Mahindra & Mahindra's historical EPS growth by clicking on this link.
A Look At The Impact Of Mahindra & Mahindra's Dilution On Its Earnings Per Share (EPS)
As you can see above, Mahindra & Mahindra has been growing its net income over the last few years, with an annualized gain of 74% over three years. And the 36% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 36% in that time. 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 it will certainly be a positive for shareholders if Mahindra & Mahindra can grow EPS persistently. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.
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 Mahindra & Mahindra's Profit Performance
Mahindra & Mahindra shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Therefore, it seems possible to us that Mahindra & Mahindra'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. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. To that end, you should learn about the 2 warning signs we've spotted with Mahindra & Mahindra (including 1 which is a bit unpleasant).
Today we've zoomed in on a single data point to better understand the nature of Mahindra & Mahindra's 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. 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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