Termbray Industries International (Holdings) (HKG:93) Is Posting Healthy Earnings, But It Is Not All Good News

We didn't see Termbray Industries International (Holdings) Limited's (HKG:93) stock surge when it reported robust earnings recently. We looked deeper into the numbers and found that shareholders might be concerned with some underlying weaknesses.

Check out our latest analysis for Termbray Industries International (Holdings)

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Termbray Industries International (Holdings) increased the number of shares on issue by 36% 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. Check out Termbray Industries International (Holdings)'s historical EPS growth by clicking on this link.

A Look At The Impact Of Termbray Industries International (Holdings)'s Dilution on Its Earnings Per Share (EPS).

As it happens, we don't know how much the company made or lost three years ago, because we don't have the data. Zooming in to the last year, we still can't talk about growth rates coherently, since it made a loss last year. What we do know is that while it's great to see a profit over the last twelve months, that profit would have been better, on a per share basis, if the company hadn't needed to issue shares. So you can see that the dilution has had a fairly significant impact on shareholders.

If Termbray Industries International (Holdings)'s EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Termbray Industries International (Holdings).

How Do Unusual Items Influence Profit?

Finally, we should also consider the fact that unusual items boosted Termbray Industries International (Holdings)'s net profit by HK$38m over the last year. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. Termbray Industries International (Holdings) had a rather significant contribution from unusual items relative to its profit to December 2020. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Termbray Industries International (Holdings)'s Profit Performance

To sum it all up, Termbray Industries International (Holdings) got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. And furthermore, it went and issued plenty of new shares, ensuring that each shareholder (who did not tip more money in) now owns a smaller proportion of the company. Considering all this we'd argue Termbray Industries International (Holdings)'s profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into Termbray Industries International (Holdings), you'd also look into what risks it is currently facing. At Simply Wall St, we found 3 warning signs for Termbray Industries International (Holdings) and we think they deserve your attention.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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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