QLS Holdings' (TSE:7075) Promising Earnings May Rest On Soft Foundations

QLS Holdings Co., Ltd's (TSE:7075) robust earnings report didn't manage to move the market for its stock. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

We've discovered 2 warning signs about QLS Holdings. View them for free.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, QLS Holdings increased the number of shares on issue by 13% 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 QLS Holdings' EPS by clicking here.

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

As you can see above, QLS Holdings has been growing its net income over the last few years, with an annualized gain of 2,762% over three years. In comparison, earnings per share only gained 2,390% over the same period. And the 63% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 53% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So QLS Holdings shareholders will want to see that EPS figure continue to increase. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. 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 QLS Holdings.

Our Take On QLS Holdings' Profit Performance

Each QLS Holdings share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Therefore, it seems possible to us that QLS Holdings' 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. So while earnings quality is important, it's equally important to consider the risks facing QLS Holdings at this point in time. At Simply Wall St, we found 2 warning signs for QLS Holdings and we think they deserve your attention.

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