The market wasn't impressed with the soft earnings from AMTD Digital Inc. (NYSE:HKD) recently. We did some analysis, and found that there are some reasons to be cautious about the headline numbers.

View our latest analysis for AMTD Digital

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, AMTD Digital increased the number of shares on issue by 64% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. 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. You can see a chart of AMTD Digital's EPS by clicking here.

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

As you can see above, AMTD Digital has been growing its net income over the last few years, with an annualized gain of 83% over three years. In comparison, earnings per share only gained 46% over the same period. Net income was down 30% over the last twelve months. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 31%. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

If AMTD Digital's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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.

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

Our Take On AMTD Digital's Profit Performance

Over the last year AMTD Digital issued new shares and so, there's a noteworthy divergence between EPS and net income growth. For this reason, we think that AMTD Digital'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 at least holders can take some solace from the 46% 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. Case in point: We've spotted 2 warning signs for AMTD Digital you should be aware of.

This note has only looked at a single factor that sheds light on the nature of AMTD Digital'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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.