Concerns Surrounding KG Eco SolutionLtd's (KOSDAQ:151860) Performance

The recent earnings posted by KG Eco Solution Co.,Ltd. (KOSDAQ:151860) were solid, but the stock didn't move as much as we expected. However the statutory profit number doesn't tell the whole story, and we have found some factors which might be of concern to shareholders.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, KG Eco SolutionLtd issued 17% more new shares over the last year. As a result, its net income is now split between 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 KG Eco SolutionLtd's EPS by clicking here.

A Look At The Impact Of KG Eco SolutionLtd's Dilution On Its Earnings Per Share (EPS)

As you can see above, KG Eco SolutionLtd has been growing its net income over the last few years, with an annualized gain of 128% over three years. In comparison, earnings per share only gained 93% over the same period. And over the last 12 months, the company grew its profit by 15%. On the other hand, earnings per share are pretty much flat, over the last twelve months. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, earnings per share growth should beget share price growth. So KG Eco SolutionLtd shareholders will want to see that EPS figure continue to increase. 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 KG Eco SolutionLtd.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that KG Eco SolutionLtd's profit was boosted by unusual items worth ₩43b in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. 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. Which is hardly surprising, given the name. 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 KG Eco SolutionLtd's Profit Performance

In its last report KG Eco SolutionLtd 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 KG Eco SolutionLtd's profits probably give an overly generous impression of its sustainable level of profitability. So while earnings quality is important, it's equally important to consider the risks facing KG Eco SolutionLtd at this point in time. You'd be interested to know, that we found 2 warning signs for KG Eco SolutionLtd and you'll want to know about them.

Our examination of KG Eco SolutionLtd 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 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 with high insider ownership.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.