E J Holdings' (TSE:2153) Profits Appear To Have Quality Issues

E J Holdings Inc.'s (TSE:2153) robust recent earnings didn't do much to move the stock. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

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One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, E J Holdings increased the number of shares on issue by 15% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. 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 E J Holdings' historical EPS growth by clicking on this link.

How Is Dilution Impacting E J Holdings' Earnings Per Share (EPS)?

As you can see above, E J Holdings has been growing its net income over the last few years, with an annualized gain of 2.6% over three years. And over the last 12 months, the company grew its profit by 5.6%. On the other hand, earnings per share are only up 5.4% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.

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

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

Our Take On E J Holdings' Profit Performance

Each E J Holdings share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Therefore, it seems possible to us that E J Holdings' true underlying earnings power is actually less than its statutory profit. The good news is that, its earnings per share increased by 5.4% in the last year. 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. If you'd like to know more about E J Holdings as a business, it's important to be aware of any risks it's facing. For example - E J Holdings has 1 warning sign we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of E J Holdings' 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.