UMENOHANA's (TSE:7604) Promising Earnings May Rest On Soft Foundations

UMENOHANA Co., Ltd. (TSE:7604) announced strong profits, but the stock was stagnant. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

See our latest analysis for UMENOHANA

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, UMENOHANA issued 11% more new shares 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 UMENOHANA's EPS by clicking here.

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

Three years ago, UMENOHANA lost money. On the bright side, in the last twelve months it grew profit by 295%. On the other hand, earnings per share are only up 274% over the same period. And so, you can see quite clearly that dilution is influencing shareholder earnings.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if UMENOHANA 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 UMENOHANA.

How Do Unusual Items Influence Profit?

Finally, we should also consider the fact that unusual items boosted UMENOHANA's net profit by JP¥178m over the last year. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. Which is hardly surprising, given the name. We can see that UMENOHANA's positive unusual items were quite significant relative to its profit in the year to October 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On UMENOHANA's Profit Performance

To sum it all up, UMENOHANA got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. On top of that, the dilution means that its earnings per share performance is worse than its profit performance. Considering all this we'd argue UMENOHANA's profits probably give an overly generous impression of its sustainable level of profitability. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example, UMENOHANA has 4 warning signs (and 1 which is concerning) we think you should know about.

Our examination of UMENOHANA has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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.