Hanyang Digitech's (KOSDAQ:078350) Solid Profits Have Weak Fundamentals

Hanyang Digitech Co., Ltd.'s (KOSDAQ:078350) stock was strong after they reported robust earnings. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.

View our latest analysis for Hanyang Digitech

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Hanyang Digitech issued 39% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. 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. Check out Hanyang Digitech's historical EPS growth by clicking on this link.

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

Hanyang Digitech was losing money three years ago. And even focusing only on the last twelve months, we don't have a meaningful growth rate because it made a loss a year ago, too. What we do know is that while it's great to see a profit over the last twelve months, that profit would have been better, on a per share basis, if the company hadn't needed to issue shares. So you can see that the dilution has had a fairly significant impact on shareholders.

In the long term, if Hanyang Digitech'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 Hanyang Digitech.

How Do Unusual Items Influence Profit?

On top of the dilution, we should also consider the ₩1.8b impact of unusual items in the last year, which had the effect of suppressing profit. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Hanyang Digitech to produce a higher profit next year, all else being equal.

Our Take On Hanyang Digitech's Profit Performance

To sum it all up, Hanyang Digitech took a hit from unusual items which pushed its profit down; without that, it would have made more money. But unfortunately the dilution means that shareholders now own a smaller proportion of the company (assuming they maintained the same number of shares). That will weigh on earnings per share, even if it is not reflected in net income. Based on these factors, we think it's very unlikely that Hanyang Digitech's statutory profits make it seem much weaker than it is. So while earnings quality is important, it's equally important to consider the risks facing Hanyang Digitech at this point in time. For instance, we've identified 5 warning signs for Hanyang Digitech (1 doesn't sit too well with us) you should be familiar with.

Our examination of Hanyang Digitech 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. 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. 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.
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