Why Nippon Steel's (TSE:5401) Shaky Earnings Are Just The Beginning Of Its Problems

Nippon Steel Corporation's (TSE:5401) recent weak earnings report didn't cause a big stock movement. However, we believe that investors should be aware of some underlying factors which may be of concern.

See our latest analysis for Nippon Steel

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Nippon Steel increased the number of shares on issue by 14% over the last twelve months by issuing new shares. 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. Check out Nippon Steel's historical EPS growth by clicking on this link.

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

As you can see above, Nippon Steel has been growing its net income over the last few years, with an annualized gain of 7.7% over three years. Net income was down 21% over the last twelve months. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 22%. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, if Nippon Steel'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.

Our Take On Nippon Steel's Profit Performance

Nippon Steel issued shares during the year, and that means its EPS performance lags its net income growth. Therefore, it seems possible to us that Nippon Steel's true underlying earnings power is actually less than its statutory profit. Nonetheless, it's still worth noting that its earnings per share have grown at 5.5% 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. 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. You'd be interested to know, that we found 2 warning signs for Nippon Steel and you'll want to know about them.

This note has only looked at a single factor that sheds light on the nature of Nippon Steel's profit. 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. 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.