Why Japan Ecosystem's (TSE:9249) Shaky Earnings Are Just The Beginning Of Its Problems

A lackluster earnings announcement from Japan Ecosystem Co., Ltd. (TSE:9249) last week didn't sink the stock price. We think that investors are worried about some weaknesses underlying the earnings.

Check out our latest analysis for Japan Ecosystem

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Japan Ecosystem increased the number of shares on issue by 6.2% over the last twelve months by issuing new shares. That means its earnings are split among 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. Check out Japan Ecosystem's historical EPS growth by clicking on this link.

How Is Dilution Impacting Japan Ecosystem's Earnings Per Share (EPS)?

Japan Ecosystem has improved its profit over the last three years, with an annualized gain of 15% in that time. In contrast, earnings per share were actually down by 16% per year, in the exact same period. Net profit actually dropped by 39% in the last year. But the EPS result was even worse, with the company recording a decline of 40%. Therefore, the dilution is having a noteworthy influence on shareholder returns.

If Japan Ecosystem'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 the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

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

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that Japan Ecosystem's profit was boosted by unusual items worth JP¥165m in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. We can see that Japan Ecosystem's positive unusual items were quite significant relative to its profit in the year to March 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Japan Ecosystem's Profit Performance

To sum it all up, Japan Ecosystem 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 Japan Ecosystem's statutory profits might make it look better than it really is on an underlying level. If you'd like to know more about Japan Ecosystem as a business, it's important to be aware of any risks it's facing. At Simply Wall St, we found 4 warning signs for Japan Ecosystem and we think they deserve your attention.

Our examination of Japan Ecosystem has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.