Are KCTech's (KRX:281820) Statutory Earnings A Good Guide To Its Underlying Profitability?

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. This article will consider whether KCTech's (KRX:281820) statutory profits are a good guide to its underlying earnings.

While KCTech was able to generate revenue of ₩290.6b in the last twelve months, we think its profit result of ₩40.4b was more important.

Check out our latest analysis for KCTech

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 will consider how KCTech's decision to issue new shares in the company has impacted returns to shareholders. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of KCTech.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, KCTech increased the number of shares on issue by 5.2% over the last twelve months by issuing new shares. 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. You can see a chart of KCTech's EPS by clicking here.

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

We don't have any data on the company's profits from three years ago. The good news is that profit was up 17% in the last twelve months. But EPS was less impressive, up only 17% in that time. 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.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if KCTech 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.

Our Take On KCTech's Profit Performance

Each KCTech share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Therefore, it seems possible to us that KCTech's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 17% EPS growth in the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing KCTech at this point in time. Case in point: We've spotted 2 warning signs for KCTech you should be aware of.

This note has only looked at a single factor that sheds light on the nature of KCTech's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 that insiders are buying.

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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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