GCL Technology Holdings' (HKG:3800) Earnings Are Of Questionable Quality

GCL Technology Holdings Limited's (HKG:3800) stock was strong after they reported robust earnings. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.

View our latest analysis for GCL Technology Holdings

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. GCL Technology Holdings expanded the number of shares on issue by 8.1% over the last year. That means its earnings are split among a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of GCL Technology Holdings' EPS by clicking here.

A Look At The Impact Of GCL Technology Holdings' Dilution on Its Earnings Per Share (EPS).

Three years ago, GCL Technology Holdings lost money. Zooming in to the last year, we still can't talk about growth rates coherently, since it made a loss last year. But mathematics aside, it is always good to see when a formerly unprofitable business come good (though we accept profit would have been higher if dilution had not been required). Therefore, the dilution is having a noteworthy influence on shareholder returns.

If GCL Technology Holdings' 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 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.

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 GCL Technology Holdings' Profit Performance

Over the last year GCL Technology Holdings issued new shares and so, there's a noteworthy divergence between EPS and net income growth. Therefore, it seems possible to us that GCL Technology Holdings' true underlying earnings power is actually less than its statutory profit. On the bright side, the company showed enough improvement to book a profit this year, after losing money last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing GCL Technology Holdings at this point in time. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of GCL Technology Holdings.

This note has only looked at a single factor that sheds light on the nature of GCL Technology Holdings' 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. 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. 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.