NEW ART HOLDINGS' (TSE:7638) Earnings Are Of Questionable Quality

NEW ART HOLDINGS Co., Ltd.'s (TSE:7638) robust earnings report didn't manage to move the market for its stock. We did some digging, and we found some concerning factors in the details.

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In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, NEW ART HOLDINGS issued 6.5% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. You can see a chart of NEW ART HOLDINGS' EPS by clicking here.

How Is Dilution Impacting NEW ART HOLDINGS' Earnings Per Share (EPS)?

NEW ART HOLDINGS has improved its profit over the last three years, with an annualized gain of 33% in that time. And the 219% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 197% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if NEW ART HOLDINGS 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 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 NEW ART HOLDINGS.

Our Take On NEW ART HOLDINGS' Profit Performance

NEW ART HOLDINGS shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Because of this, we think that it may be that NEW ART HOLDINGS' statutory profits are better than its underlying earnings power. But the happy news is that, while acknowledging we have to look beyond the statutory numbers, those numbers are still improving, with EPS growing at a very high rate over the last year. 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. If you'd like to know more about NEW ART HOLDINGS as a business, it's important to be aware of any risks it's facing. While conducting our analysis, we found that NEW ART HOLDINGS has 2 warning signs and it would be unwise to ignore them.

This note has only looked at a single factor that sheds light on the nature of NEW ART HOLDINGS' 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.