Yamae Group HoldingsLtd's (TSE:7130) Solid Earnings May Rest On Weak Foundations

Yamae Group Holdings Co.,Ltd.'s (TSE:7130 ) stock didn't jump after it announced some healthy earnings. We think that investors might be worried about some concerning underlying factors.

See our latest analysis for Yamae Group HoldingsLtd

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Yamae Group HoldingsLtd increased the number of shares on issue by 17% over the last twelve months by issuing new shares. As a result, its net income is now split between 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 Yamae Group HoldingsLtd's EPS by clicking here.

How Is Dilution Impacting Yamae Group HoldingsLtd's Earnings Per Share (EPS)?

As you can see above, Yamae Group HoldingsLtd has been growing its net income over the last few years, with an annualized gain of 354% over three years. In comparison, earnings per share only gained 342% over the same period. And over the last 12 months, the company grew its profit by 7.5%. But in comparison, EPS only increased by 4.4% over the same period. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Yamae Group HoldingsLtd can grow EPS persistently. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. 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 Yamae Group HoldingsLtd.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted Yamae Group HoldingsLtd's net profit by JP¥970m over the last year. 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 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. 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 Yamae Group HoldingsLtd's Profit Performance

In its last report Yamae Group HoldingsLtd benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. On top of that, the dilution means that its earnings per share performance is worse than its profit performance. For the reasons mentioned above, we think that a perfunctory glance at Yamae Group HoldingsLtd's statutory profits might make it look better than it really is on an underlying level. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. You'd be interested to know, that we found 3 warning signs for Yamae Group HoldingsLtd and you'll want to know about these.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. But there are plenty of other ways to inform your opinion of a company. 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.