Gokurakuyu Holdings' (TSE:2340) Earnings Are Weaker Than They Seem

Gokurakuyu Holdings Co., Ltd.'s (TSE:2340) robust earnings report didn't manage to move the market for its stock. We did some digging, and we found some concerning factors in the details.

See our latest analysis for Gokurakuyu Holdings

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Gokurakuyu Holdings expanded the number of shares on issue by 36% 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 Gokurakuyu Holdings' EPS by clicking here.

How Is Dilution Impacting Gokurakuyu Holdings' Earnings Per Share (EPS)?

Three years ago, Gokurakuyu Holdings lost money. And even focusing only on the last twelve months, we don't have a meaningful growth rate because it made a loss a year ago, too. But mathematics aside, it is always good to see when a formerly unprofitable business come good (though we accept profit would have been higher if dilution had not been required). Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

If Gokurakuyu Holdings' 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 Gokurakuyu Holdings.

How Do Unusual Items Influence Profit?

On top of the dilution, we should also consider the JP¥211m impact of unusual items in the last year, which had the effect of suppressing profit. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. 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 Gokurakuyu Holdings 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 Gokurakuyu Holdings' Profit Performance

Gokurakuyu Holdings 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. Based on these factors, we think it's very unlikely that Gokurakuyu Holdings' statutory profits make it seem much weaker than it is. If you want to do dive deeper into Gokurakuyu Holdings, you'd also look into what risks it is currently facing. At Simply Wall St, we found 4 warning signs for Gokurakuyu Holdings and we think they deserve your attention.

Our examination of Gokurakuyu Holdings has focussed on certain factors that can make its earnings look better than they are. 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.