The market wasn't impressed with the soft earnings from Takachiho Co.,Ltd. (TSE:8225) recently. We did some analysis, and found that there are some reasons to be cautious about the headline numbers.
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, TakachihoLtd issued 8.3% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. 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. Check out TakachihoLtd's historical EPS growth by clicking on this link.
How Is Dilution Impacting TakachihoLtd's Earnings Per Share (EPS)?
TakachihoLtd was losing money three years ago. And even focusing only on the last twelve months, we see profit is down 27%. Sadly, earnings per share fell further, down a full 28% in that time. And so, you can see quite clearly that dilution is influencing shareholder earnings.
In the long term, if TakachihoLtd'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.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of TakachihoLtd.
Our Take On TakachihoLtd's Profit Performance
TakachihoLtd issued shares during the year, and that means its EPS performance lags its net income growth. Therefore, it seems possible to us that TakachihoLtd'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. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Case in point: We've spotted 4 warning signs for TakachihoLtd you should be aware of.
Today we've zoomed in on a single data point to better understand the nature of TakachihoLtd'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.
Valuation is complex, but we're here to simplify it.
Discover if TakachihoLtd might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.