Should You Rely On PuequLTD's (TYO:9264) Earnings Growth?

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. Today we'll focus on whether this year's statutory profits are a good guide to understanding PuequLTD (TYO:9264).

We like the fact that PuequLTD made a profit of JP¥222.0m on its revenue of JP¥6.10b, in the last year. In the chart below, you can see that its profit and revenue have both grown over the last three years.

See our latest analysis for PuequLTD

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. Therefore, today we will consider the nature of PuequLTD's statutory earnings with reference to its dilution of shareholders and the impact of unusual items. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of PuequLTD.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, PuequLTD increased the number of shares on issue by 13% 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. Check out PuequLTD's historical EPS growth by clicking on this link.

A Look At The Impact Of PuequLTD's Dilution on Its Earnings Per Share (EPS).

PuequLTD has improved its profit over the last three years, with an annualized gain of 55% in that time. In contrast, earnings per share were actually down by 0.2% per year, in the exact same period. And at a glance the 55% gain in profit over the last year impresses. But in comparison, EPS only increased by 42% over the same period. So you can see that the dilution has had a bit of an impact on shareholders. Therefore, the dilution is having a noteworthy influence on shareholder returns. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if PuequLTD 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 the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted PuequLTD's net profit by JP¥88m over the last year. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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 PuequLTD's positive unusual items were quite significant relative to its profit in the year to August 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 PuequLTD's Profit Performance

To sum it all up, PuequLTD got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. On top of that, the dilution means that its earnings per share performance is worse than its profit performance. For the reasons mentioned above, we think that a perfunctory glance at PuequLTD's statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into PuequLTD, you'd also look into what risks it is currently facing. For example, PuequLTD has 5 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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 is always more to discover if you are capable of focussing your mind on minutiae. 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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