We're Not So Sure You Should Rely on Nippon Kanryu Industry's (FKSE:1771) Statutory Earnings

As a general rule, we think profitable companies are less risky than companies that lose money. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether Nippon Kanryu Industry's (FKSE:1771) statutory profits are a good guide to its underlying earnings.

We like the fact that Nippon Kanryu Industry made a profit of JP¥612.0m on its revenue of JP¥14.4b, in the last year. Happily, it has grown both its profit and revenue over the last three years, as you can see in the chart below.

View our latest analysis for Nippon Kanryu Industry

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. In this article we'll look at how Nippon Kanryu Industry is impacting shareholders by issuing new shares. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Nippon Kanryu Industry.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Nippon Kanryu Industry expanded the number of shares on issue by 40% over the last year. Therefore, each share now receives a smaller portion of profit. 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 Nippon Kanryu Industry's EPS by clicking here.

How Is Dilution Impacting Nippon Kanryu Industry's Earnings Per Share? (EPS)

As you can see above, Nippon Kanryu Industry has been growing its net income over the last few years, with an annualized gain of 43% over three years. However, net income was pretty flat over the last year with a miniscule decrease. Earnings per share are pretty much flat, too over the last twelve months, but EPS growth came in below below net income growth. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

If Nippon Kanryu Industry'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 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.

Our Take On Nippon Kanryu Industry's Profit Performance

Nippon Kanryu Industry issued shares during the year, and that means its EPS performance lags its net income growth. As a result, we think it may well be the case that Nippon Kanryu Industry's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 43% per annum growth in EPS for the last three. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you want to do dive deeper into Nippon Kanryu Industry, you'd also look into what risks it is currently facing. At Simply Wall St, we found 2 warning signs for Nippon Kanryu Industry and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Nippon Kanryu Industry's profit. But there are plenty of other ways to inform your opinion of a company. 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 that insiders are buying to be useful.

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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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