Shikibo's (TSE:3109) Sluggish Earnings Might Be Just The Beginning Of Its Problems

Shikibo Ltd.'s (TSE:3109) recent weak earnings report didn't cause a big stock movement. 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. Shikibo expanded the number of shares on issue by 9.4% over the last year. 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. 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)

As you can see above, Shikibo has been growing its net income over the last few years, with an annualized gain of 152% over three years. In comparison, earnings per share only gained 128% over the same period. Net income was down 41% over the last twelve months. But the EPS result was even worse, with the company recording a decline of 43%. Therefore, the dilution is having a noteworthy influence on shareholder returns.

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 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 Shikibo.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that Shikibo's profit suffered from unusual items, which reduced profit by JP¥146m in the last twelve months. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. 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. If Shikibo doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Shikibo's Profit Performance

Shikibo suffered from unusual items which depressed its profit in its last report; if that is not repeated then profit should be higher, all else being equal. But on the other hand, the company issued more shares, so without buying more shares each shareholder will end up with a smaller part of the profit. Given the contrasting considerations, we don't have a strong view as to whether Shikibo's profits are an apt reflection of its underlying potential for profit. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Be aware that Shikibo is showing 5 warning signs in our investment analysis and 2 of those are a bit concerning...

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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.