Boryung's (KRX:003850) Anemic Earnings Might Be Worse Than You Think

The subdued market reaction suggests that Boryung Corporation's (KRX:003850) recent earnings didn't contain any surprises. We think that investors are worried about some weaknesses underlying the earnings.

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To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Boryung issued 28% 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 Boryung's EPS by clicking here.

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

Boryung has improved its profit over the last three years, with an annualized gain of 4.7% in that time. But on the other hand, earnings per share actually fell by 16% per year. Net income was down 9.0% over the last twelve months. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 27%. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

If Boryung's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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 Boryung.

The Impact Of Unusual Items On Profit

On top of the dilution, we should also consider the ₩24b impact of unusual items in the last year, which had the effect of suppressing profit. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Boryung to produce a higher profit next year, all else being equal.

Our Take On Boryung's Profit Performance

Boryung suffered from unusual items which depressed its profit in its last report; if that is not repeated then profit should be higher, all else being equal. But on the other hand, the company issued more shares, so without buying more shares each shareholder will end up with a smaller part of the profit. Given the contrasting considerations, we don't have a strong view as to whether Boryung's profits are an apt reflection of its underlying potential for profit. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. In terms of investment risks, we've identified 2 warning signs with Boryung, and understanding these should be part of your investment process.

Our examination of Boryung has focussed on certain factors that can make its earnings look better than they are. 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. 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.