STG's (TSE:5858) Profits Appear To Have Quality Issues

Following the solid earnings report from STG Co., Ltd. (TSE:5858), the market responded by bidding up the stock price. However, we think that shareholders should be cautious as we found some worrying factors underlying the profit.

Check out our latest analysis for STG

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, STG issued 24% more new shares over the last year. 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 STG's historical EPS growth by clicking on this link.

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

STG has improved its profit over the last three years, with an annualized gain of 164% in that time. And in the last year the company managed to bump profit up by 3.7%. But in comparison, EPS only increased by 3.1% over the same period. So you can see that the dilution has had a fairly significant impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if STG can grow EPS persistently. 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of STG.

Our Take On STG's Profit Performance

STG 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 STG's true underlying earnings power is actually less than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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'd like to know more about STG as a business, it's important to be aware of any risks it's facing. For example, STG has 4 warning signs (and 2 which are a bit concerning) we think you should know about.

Today we've zoomed in on a single data point to better understand the nature of STG'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.