JW Pharmaceutical's (KRX:001060) Earnings Are Of Questionable Quality

JW Pharmaceutical Corporation's (KRX:001060) robust earnings report didn't manage to move the market for its stock. Our analysis suggests that shareholders have noticed something concerning in the numbers.

View our latest analysis for JW Pharmaceutical

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, JW Pharmaceutical issued 5.5% more new shares over the last year. That means its earnings are split among 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. You can see a chart of JW Pharmaceutical's EPS by clicking here.

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

Three years ago, JW Pharmaceutical lost money. On the bright side, in the last twelve months it grew profit by 16%. On the other hand, earnings per share are only up 15% over the same period. And so, you can see quite clearly that dilution is influencing shareholder earnings.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So JW Pharmaceutical 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.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On JW Pharmaceutical's Profit Performance

JW Pharmaceutical shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Therefore, it seems possible to us that JW Pharmaceutical's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 15% EPS growth in the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing JW Pharmaceutical at this point in time. You'd be interested to know, that we found 2 warning signs for JW Pharmaceutical and you'll want to know about these.

This note has only looked at a single factor that sheds light on the nature of JW Pharmaceutical's profit. 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 that insiders are buying 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.