Nippn's (TSE:2001) Anemic Earnings Might Be Worse Than You Think

The subdued market reaction suggests that Nippn Corporation's (TSE:2001) recent earnings didn't contain any surprises. However, we believe that investors should be aware of some underlying factors which may be of concern.

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To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Nippn expanded the number of shares on issue by 7.9% over the last year. Therefore, each share now receives a smaller portion of profit. 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. Check out Nippn's historical EPS growth by clicking on this link.

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

Nippn has improved its profit over the last three years, with an annualized gain of 121% in that time. Net profit actually dropped by 37% in the last year. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 39%. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, if Nippn's earnings per share can increase, then the share price should too. 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.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that Nippn's profit was boosted by unusual items worth JP¥5.6b in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Nippn's Profit Performance

In its last report Nippn benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. And furthermore, it went and issued plenty of new shares, ensuring that each shareholder (who did not tip more money in) now owns a smaller proportion of the company. Considering all this we'd argue Nippn'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. Case in point: We've spotted 4 warning signs for Nippn you should be mindful of and 1 of them is concerning.

Our examination of Nippn 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. 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.