Why AP Healthcare's (KOSDAQ:109960) Soft Earnings Are Just The Beginning Of Its Problems

AP Healthcare Inc. (KOSDAQ:109960) recently posted soft earnings but shareholders didn't react strongly. We did some digging, and we believe that investors are missing some worrying factors underlying the profit figures.

View our latest analysis for AP Healthcare

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, AP Healthcare increased the number of shares on issue by 203% 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. You can see a chart of AP Healthcare's EPS by clicking here.

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

As you can see above, AP Healthcare has been growing its net income over the last few years, with an annualized gain of 1,029% over three years. In comparison, earnings per share only gained 289% over the same period. Net income was down 30% over the last twelve months. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 70%. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

In the long term, if AP Healthcare's earnings per share can increase, then the share price should too. 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 AP Healthcare.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that AP Healthcare's profit was boosted by unusual items worth ₩47b in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. AP Healthcare had a rather significant contribution from unusual items relative to its profit to September 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On AP Healthcare's Profit Performance

In its last report AP Healthcare 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. On reflection, the above-mentioned factors give us the strong impression that AP Healthcare'sunderlying earnings power is not as good as it might seem, based on the statutory profit numbers. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Be aware that AP Healthcare is showing 4 warning signs in our investment analysis and 1 of those doesn't sit too well with us...

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 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 with high insider ownership.

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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.