Shikibo's (TSE:3109) Problems Go Beyond Weak Profit

The subdued market reaction suggests that Shikibo Ltd.'s (TSE:3109) recent earnings didn't contain any surprises. We think that investors are worried about some weaknesses underlying the earnings.

View our latest analysis for Shikibo

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, Shikibo increased the number of shares on issue by 8.6% over the last twelve months by issuing new shares. 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 Shikibo's EPS by clicking here.

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

Shikibo has improved its profit over the last three years, with an annualized gain of 8,789% in that time. But EPS was only up 8,173% per year, in the exact same period. Net income was down 49% over the last twelve months. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 49%. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, if Shikibo's earnings per share can increase, then the share price should too. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

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

Our Take On Shikibo's Profit Performance

Shikibo issued shares during the year, and that means its EPS performance lags its net income growth. Therefore, it seems possible to us that Shikibo's true underlying earnings power is actually less than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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 want to do dive deeper into Shikibo, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 4 warning signs for Shikibo (of which 1 can't be ignored!) you should know about.

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