Dongkuk HoldingsLtd's (KRX:001230) Solid Earnings May Rest On Weak Foundations

The recent earnings posted by Dongkuk Holdings Co.,Ltd. (KRX:001230) were solid, but the stock didn't move as much as we expected. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

See our latest analysis for Dongkuk HoldingsLtd

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, Dongkuk HoldingsLtd increased the number of shares on issue by 75% over the last twelve months by issuing new shares. As a result, its net income is now split between a greater number of shares. 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 Dongkuk HoldingsLtd's historical EPS growth by clicking on this link.

A Look At The Impact Of Dongkuk HoldingsLtd's Dilution On Its Earnings Per Share (EPS)

As you can see above, Dongkuk HoldingsLtd has been growing its net income over the last few years, with an annualized gain of 580% over three years. In comparison, earnings per share only gained 111% over the same period. And the 825% profit boost in the last year certainly seems impressive at first glance. But in comparison, EPS only increased by 1,608% over the same period. Therefore, one can observe that the dilution is having a fairly profound effect 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 Dongkuk HoldingsLtd 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 Dongkuk HoldingsLtd.

Our Take On Dongkuk HoldingsLtd's Profit Performance

Dongkuk HoldingsLtd shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. For this reason, we think that Dongkuk HoldingsLtd's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But the good news is that its EPS growth over the last three years has been very impressive. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So while earnings quality is important, it's equally important to consider the risks facing Dongkuk HoldingsLtd at this point in time. Be aware that Dongkuk HoldingsLtd is showing 3 warning signs in our investment analysis and 1 of those is concerning...

Today we've zoomed in on a single data point to better understand the nature of Dongkuk HoldingsLtd's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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. 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.