Kitagawa SeikiLtd's (TSE:6327) Problems Go Beyond Weak Profit

A lackluster earnings announcement from Kitagawa Seiki Co.,Ltd. (TSE:6327) last week didn't sink the stock price. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

View our latest analysis for Kitagawa SeikiLtd

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, Kitagawa SeikiLtd increased the number of shares on issue by 14% over the last twelve months by issuing new shares. As a result, its net income is now split between a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. You can see a chart of Kitagawa SeikiLtd's EPS by clicking here.

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

Kitagawa SeikiLtd has improved its profit over the last three years, with an annualized gain of 66% in that time. In comparison, earnings per share only gained 47% over the same period. Net income was down 41% over the last twelve months. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 48%. So you can see that the dilution has had a bit of an impact on shareholders.

If Kitagawa SeikiLtd'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.

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 Kitagawa SeikiLtd's Profit Performance

Over the last year Kitagawa SeikiLtd issued new shares and so, there's a noteworthy divergence between EPS and net income growth. Therefore, it seems possible to us that Kitagawa SeikiLtd'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 47% over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing Kitagawa SeikiLtd at this point in time. For example, we've discovered 2 warning signs that you should run your eye over to get a better picture of Kitagawa SeikiLtd.

This note has only looked at a single factor that sheds light on the nature of Kitagawa SeikiLtd's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 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.