We Think That There Are Some Issues For D & M Company (TSE:189A) Beyond Its Promising Earnings

The market shrugged off D & M Company Co., Ltd.'s (TSE:189A) solid earnings report. Our analysis showed that there are some concerning factors in the earnings that investors may be cautious of.

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One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. D & M Company expanded the number of shares on issue by 7.3% over the last year. 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 D & M Company's EPS by clicking here.

How Is Dilution Impacting D & M Company's Earnings Per Share (EPS)?

As you can see above, D & M Company has been growing its net income over the last few years, with an annualized gain of 52% over three years. But EPS was only up 4.2% per year, in the exact same period. And at a glance the 24% gain in profit over the last year impresses. But earnings per share are actually down 15%, over the last twelve months. So you can see that the dilution has had a bit of an impact on shareholders.

If D & M Company's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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 D & M Company.

Our Take On D & M Company's Profit Performance

D & M Company 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 D & M Company's true underlying earnings power is actually less than its statutory profit. In further bad news, its earnings per share decreased in the last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For example, we've found that D & M Company has 3 warning signs (1 is a bit unpleasant!) that deserve your attention before going any further with your analysis.

Today we've zoomed in on a single data point to better understand the nature of D & M Company's 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. 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.