We Think You Should Be Aware Of Some Concerning Factors In Tachikawa's (TSE:7989) Earnings

Tachikawa Corporation's (TSE:7989) robust recent earnings didn't do much to move the stock. However the statutory profit number doesn't tell the whole story, and we have found some factors which might be of concern to shareholders.

See our latest analysis for Tachikawa

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Tachikawa increased the number of shares on issue by 8.2% over the last twelve months by issuing new shares. As a result, its net income is now split between 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. Check out Tachikawa's historical EPS growth by clicking on this link.

How Is Dilution Impacting Tachikawa's Earnings Per Share (EPS)?

Unfortunately, Tachikawa's profit is down 2.3% per year over three years. The good news is that profit was up 3.5% in the last twelve months. But EPS was less impressive, up only 3.8% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Tachikawa can grow EPS persistently. 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 Tachikawa.

Our Take On Tachikawa's Profit Performance

Tachikawa shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Therefore, it seems possible to us that Tachikawa's true underlying earnings power is actually less than its statutory profit. The good news is that its earnings per share increased slightly in the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing Tachikawa at this point in time. To that end, you should learn about the 2 warning signs we've spotted with Tachikawa (including 1 which is potentially serious).

Today we've zoomed in on a single data point to better understand the nature of Tachikawa'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. 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.