We Think That There Are More Issues For Tone (TSE:5967) Than Just Sluggish Earnings

The subdued market reaction suggests that Tone Co., Ltd.'s (TSE:5967) recent earnings didn't contain any surprises. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

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One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Tone expanded the number of shares on issue by 5.1% over the last year. 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. You can see a chart of Tone's EPS by clicking here.

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

Tone has improved its profit over the last three years, with an annualized gain of 14% in that time. Net income was down 16% over the last twelve months. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 16%. So you can see that the dilution has had a bit of an impact on shareholders.

If Tone'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 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 Tone.

Our Take On Tone's Profit Performance

Tone issued shares during the year, and that means its EPS performance lags its net income growth. Therefore, it seems possible to us that Tone's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 12% per annum growth in EPS for the last three. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. In terms of investment risks, we've identified 3 warning signs with Tone, and understanding these bad boys should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Tone's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.