Dayou A-TechLtd's (KRX:002880) Solid Earnings May Rest On Weak Foundations

Dayou A-Tech Co.,Ltd (KRX:002880) just released a solid earnings report, and the stock displayed some strength. However, we think that shareholders should be cautious as we found some worrying factors underlying the profit.

Check out our latest analysis for Dayou A-TechLtd

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, Dayou A-TechLtd increased the number of shares on issue by 21% over the last twelve months by issuing new shares. That means its earnings are split among a greater number of shares. 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. Check out Dayou A-TechLtd's historical EPS growth by clicking on this link.

A Look At The Impact Of Dayou A-TechLtd's Dilution On Its Earnings Per Share (EPS)

Three years ago, Dayou A-TechLtd lost money. On the bright side, in the last twelve months it grew profit by 227%. But EPS was less impressive, up only 180% in that time. So you can see that the dilution has had a bit of an impact on shareholders.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Dayou A-TechLtd shareholders will want to see that EPS figure continue to increase. 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Dayou A-TechLtd.

How Do Unusual Items Influence Profit?

Finally, we should also consider the fact that unusual items boosted Dayou A-TechLtd's net profit by ₩1.9b over the last year. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And that's as you'd expect, given these boosts are described as 'unusual'. 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 Dayou A-TechLtd's Profit Performance

In its last report Dayou A-TechLtd benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. And furthermore, it went and issued plenty of new shares, ensuring that each shareholder (who did not tip more money in) now owns a smaller proportion of the company. Considering all this we'd argue Dayou A-TechLtd's profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about Dayou A-TechLtd as a business, it's important to be aware of any risks it's facing. Our analysis shows 3 warning signs for Dayou A-TechLtd (1 is a bit concerning!) and we strongly recommend you look at them before investing.

Our examination of Dayou A-TechLtd has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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.