Additional Considerations Required While Assessing Hirakawa Hewtech's (TSE:5821) Strong Earnings

Despite posting some strong earnings, the market for Hirakawa Hewtech Corp.'s (TSE:5821) stock hasn't moved much. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

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One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Hirakawa Hewtech increased the number of shares on issue by 25% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. Check out Hirakawa Hewtech's historical EPS growth by clicking on this link.

A Look At The Impact Of Hirakawa Hewtech's Dilution On Its Earnings Per Share (EPS)

Hirakawa Hewtech has improved its profit over the last three years, with an annualized gain of 35% in that time. And at a glance the 40% gain in profit over the last year impresses. But in comparison, EPS only increased by 34% over the same period. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

In the long term, earnings per share growth should beget share price growth. So Hirakawa Hewtech shareholders will want to see that EPS figure continue to increase. 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.

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 Hirakawa Hewtech's Profit Performance

Hirakawa Hewtech shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Therefore, it seems possible to us that Hirakawa Hewtech's true underlying earnings power is actually less than its statutory profit. Nonetheless, it's still worth noting that its earnings per share have grown at 28% over the last three years. 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. So while earnings quality is important, it's equally important to consider the risks facing Hirakawa Hewtech at this point in time. In terms of investment risks, we've identified 1 warning sign with Hirakawa Hewtech, and understanding it should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Hirakawa Hewtech'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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.