Investors Shouldn't Be Too Comfortable With DuChemBIOLtd's (KOSDAQ:176750) Earnings

DuChemBIO Co.,Ltd.'s (KOSDAQ:176750) stock was strong after they recently reported robust earnings. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.

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To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. DuChemBIOLtd expanded the number of shares on issue by 5.4% over the last year. Therefore, each share now receives a smaller portion of profit. 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. Check out DuChemBIOLtd's historical EPS growth by clicking on this link.

How Is Dilution Impacting DuChemBIOLtd's Earnings Per Share (EPS)?

We don't have any data on the company's profits from three years ago. The good news is that profit was up 100% in the last twelve months. On the other hand, earnings per share are only up 99% over the same period. 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 DuChemBIOLtd 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 DuChemBIOLtd.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that DuChemBIOLtd's profit was boosted by unusual items worth ₩388m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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. And, after all, that's exactly what the accounting terminology implies. 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 DuChemBIOLtd's Profit Performance

In its last report DuChemBIOLtd 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 DuChemBIOLtd's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into DuChemBIOLtd, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 2 warning signs for DuChemBIOLtd and you'll want to know about them.

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 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. 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.