Weak Statutory Earnings May Not Tell The Whole Story For Densan (TSE:3640)

A lackluster earnings announcement from Densan Co., Ltd. (TSE:3640) 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.

See our latest analysis for Densan

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Densan expanded the number of shares on issue by 15% over the last year. That means its earnings are split among a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of Densan's EPS by clicking here.

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

Densan has improved its profit over the last three years, with an annualized gain of 50% in that time. Net profit actually dropped by 44% in the last year. But the EPS result was even worse, with the company recording a decline of 47%. And so, you can see quite clearly that dilution is influencing shareholder earnings.

If Densan'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 Densan.

Our Take On Densan's Profit Performance

Over the last year Densan issued new shares and so, there's a noteworthy divergence between EPS and net income growth. Therefore, it seems possible to us that Densan'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 54% 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. For example - Densan has 4 warning signs we think you should be aware of.

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