Here's Why We Don't Think iA's (KOSDAQ:038880) Statutory Earnings Reflect Its Underlying Earnings Potential

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. In this article, we'll look at how useful this year's statutory profit is, when analysing iA (KOSDAQ:038880).

We like the fact that iA made a profit of ₩6.97b on its revenue of ₩58.9b, in the last year. Even though revenue is down over the last three years, you can see in the chart below that the company has moved from loss-making to profitable.

See our latest analysis for iA

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. In this article we'll look at how iA is impacting shareholders by issuing new shares, as well as how unusual items have affected the income line. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of iA.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. iA expanded the number of shares on issue by 14% over the last year. 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. You can see a chart of iA's EPS by clicking here.

A Look At The Impact Of iA's Dilution on Its Earnings Per Share (EPS).

Three years ago, iA lost money. The good news is that profit was up 202% in the last twelve months. On the other hand, earnings per share are only up 170% over the same period. So you can see that the dilution has had a bit of an impact on shareholders. Therefore, the dilution is having a noteworthy influence on shareholder returns. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if iA can grow EPS persistently. 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.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that iA's profit was boosted by unusual items worth ₩1.0b in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. If iA doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On iA's Profit Performance

To sum it all up, iA got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. On top of that, the dilution means that its earnings per share performance is worse than its profit performance. For the reasons mentioned above, we think that a perfunctory glance at iA's statutory profits might make it look better than it really is on an underlying level. So while earnings quality is important, it's equally important to consider the risks facing iA at this point in time. In terms of investment risks, we've identified 2 warning signs with iA, and understanding them should be part of your investment process.

Our examination of iA 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 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. 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.

When trading iA or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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