nms Holdings' (TSE:2162) Sluggish Earnings Might Be Just The Beginning Of Its Problems

A lackluster earnings announcement from nms Holdings Corporation (TSE:2162) last week didn't sink the stock price. We think that investors are worried about some weaknesses underlying the earnings.

Our free stock report includes 5 warning signs investors should be aware of before investing in nms Holdings. Read for free now.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, nms Holdings issued 24% 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. Check out nms Holdings' historical EPS growth by clicking on this link.

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

Three years ago, nms Holdings lost money. And even focusing only on the last twelve months, we see profit is down 15%. Sadly, earnings per share fell further, down a full 16% in that time. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

If nms Holdings' 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 nms Holdings.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that nms Holdings' profit suffered from unusual items, which reduced profit by JP¥184m in the last twelve months. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect nms Holdings to produce a higher profit next year, all else being equal.

Our Take On nms Holdings' Profit Performance

To sum it all up, nms Holdings took a hit from unusual items which pushed its profit down; without that, it would have made more money. But unfortunately the dilution means that shareholders now own a smaller proportion of the company (assuming they maintained the same number of shares). That will weigh on earnings per share, even if it is not reflected in net income. Based on these factors, we think it's very unlikely that nms Holdings' statutory profits make it seem much weaker than it is. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. To help with this, we've discovered 5 warning signs (2 don't sit too well with us!) that you ought to be aware of before buying any shares in nms Holdings.

Our examination of nms Holdings has focussed on certain factors that can make its earnings look better than they are. 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.