Why NPR-Riken's (TSE:6209) Earnings Are Weaker Than They Seem

Investors were disappointed with NPR-Riken Corporation's (TSE:6209) recent earnings release. We did some digging and found some underlying numbers that are worrying.

See our latest analysis for NPR-Riken

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, NPR-Riken increased the number of shares on issue by 25% over the last twelve months by issuing new shares. As a result, its net income is now split between 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 NPR-Riken's EPS by clicking here.

A Look At The Impact Of NPR-Riken's Dilution On Its Earnings Per Share (EPS)

NPR-Riken has improved its profit over the last three years, with an annualized gain of 1,300% in that time. But EPS was only up 1,056% per year, in the exact same period. And at a glance the 510% gain in profit over the last year impresses. On the other hand, earnings per share are only up 406% in that time. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if NPR-Riken 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 NPR-Riken.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that NPR-Riken's profit was boosted by unusual items worth JP¥18b in the last twelve months. 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. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that NPR-Riken's positive unusual items were quite significant relative to its profit in the year to March 2024. 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 NPR-Riken's Profit Performance

To sum it all up, NPR-Riken 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 NPR-Riken's profits probably give an overly generous impression of its sustainable level of profitability. 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 3 warning signs for NPR-Riken you should be aware of.

Our examination of NPR-Riken has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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.