Impressive Earnings May Not Tell The Whole Story For Nankai Chemical CompanyLimited (TSE:4040)

Despite announcing strong earnings, Nankai Chemical Company,Limited's (TSE:4040) stock was sluggish. We think that the market might be paying attention to some underlying factors that they find to be concerning.

Check out our latest analysis for Nankai Chemical CompanyLimited

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Nankai Chemical CompanyLimited increased the number of shares on issue by 54% 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 Nankai Chemical CompanyLimited's EPS by clicking here.

How Is Dilution Impacting Nankai Chemical CompanyLimited's Earnings Per Share (EPS)?

As you can see above, Nankai Chemical CompanyLimited has been growing its net income over the last few years, with an annualized gain of 647% over three years. But EPS was only up 301% per year, in the exact same period. And the 130% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 50% in that time. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So Nankai Chemical CompanyLimited shareholders will want to see that EPS figure continue to increase. 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 Nankai Chemical CompanyLimited.

Our Take On Nankai Chemical CompanyLimited's Profit Performance

Nankai Chemical CompanyLimited shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. For this reason, we think that Nankai Chemical CompanyLimited's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Be aware that Nankai Chemical CompanyLimited is showing 4 warning signs in our investment analysis and 2 of those are concerning...

This note has only looked at a single factor that sheds light on the nature of Nankai Chemical CompanyLimited's profit. But there are plenty of other ways to inform your opinion of a company. 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.