There May Be Underlying Issues With The Quality Of EPI (Holdings)'s (HKG:689) Earnings

Unsurprisingly, EPI (Holdings) Limited's (HKG:689) stock price was strong on the back of its healthy earnings report. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.

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One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. EPI (Holdings) 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 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 EPI (Holdings)'s historical EPS growth by clicking on this link.

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

Three years ago, EPI (Holdings) lost money. The good news is that profit was up 61% in the last twelve months. But EPS was less impressive, up only 50% in that time. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if EPI (Holdings) 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 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 EPI (Holdings).

Our Take On EPI (Holdings)'s Profit Performance

EPI (Holdings) shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Because of this, we think that it may be that EPI (Holdings)'s statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 50% EPS growth in the last year. 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. 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. While conducting our analysis, we found that EPI (Holdings) 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 EPI (Holdings)'s profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 with significant insider holdings 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.