JALCO Holdings (TYO:6625) Is Growing Earnings But Are They A Good Guide?

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. In this article, we'll look at how useful this year's statutory profit is, when analysing JALCO Holdings (TYO:6625).

We like the fact that JALCO Holdings made a profit of JP¥603.0m on its revenue of JP¥1.89b, in the last year. One positive is that it has grown both its profit and its revenue, over the last few years.

See our latest analysis for JALCO Holdings

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. In this article we will consider how JALCO Holdings' decision to issue new shares in the company has impacted returns to shareholders. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of JALCO Holdings.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, JALCO Holdings increased the number of shares on issue by 16% 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. You can see a chart of JALCO Holdings' EPS by clicking here.

A Look At The Impact Of JALCO Holdings' Dilution on Its Earnings Per Share (EPS).

As you can see above, JALCO Holdings has been growing its net income over the last few years, with an annualized gain of 30% over three years. In contrast, earnings per share were actually down by 26% per year, in the exact same period. And in the last year the company managed to bump profit up by 15%. But in comparison, EPS only increased by 4.3% over the same period. So you can see that the dilution has had a bit of an impact on shareholders. Therefore, the dilution is having a noteworthy influence on shareholder returns. And so, you can see quite clearly that dilution is influencing shareholder earnings.

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 JALCO Holdings can grow EPS persistently. 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.

Our Take On JALCO Holdings' Profit Performance

JALCO 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 JALCO Holdings' statutory profits are better than its underlying earnings power. And we are pleased to note that EPS is at least heading in the right direction in the alst twelve months. 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. Our analysis shows 2 warning signs for JALCO Holdings (1 is concerning!) and we strongly recommend you look at them before investing.

This note has only looked at a single factor that sheds light on the nature of JALCO Holdings' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 that insiders are buying.

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This article by Simply Wall St is general in nature. 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.
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