Why Obara Group's (TSE:6877) Shaky Earnings Are Just The Beginning Of Its Problems

The subdued market reaction suggests that Obara Group Incorporated's (TSE:6877) recent earnings didn't contain any surprises. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

Check out our latest analysis for Obara Group

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Obara Group issued 10% more new shares over the last year. As a result, its net income is now split between a greater number of shares. 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. You can see a chart of Obara Group's EPS by clicking here.

How Is Dilution Impacting Obara Group's Earnings Per Share (EPS)?

Obara Group has improved its profit over the last three years, with an annualized gain of 24% in that time. Net profit actually dropped by 20% in the last year. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 25%. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, if Obara Group's earnings per share can increase, then the share price should too. 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 Obara Group's Profit Performance

Obara Group issued shares during the year, and that means its EPS performance lags its net income growth. Because of this, we think that it may be that Obara Group's statutory profits are better than its underlying earnings power. Nonetheless, it's still worth noting that its earnings per share have grown at 25% over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. In terms of investment risks, we've identified 2 warning signs with Obara Group, and understanding them should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Obara Group's profit. 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 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.