AhnLab's (KOSDAQ:053800) Profits May Not Reveal Underlying Issues

AhnLab, Inc.'s (KOSDAQ:053800 ) stock didn't jump after it announced some healthy earnings. We think that investors might be worried about some concerning underlying factors.

We've discovered 1 warning sign about AhnLab. View them for free.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, AhnLab issued 9.8% 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. Check out AhnLab's historical EPS growth by clicking on this link.

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

As you can see above, AhnLab has been growing its net income over the last few years, with an annualized gain of 80% over three years. And in the last year the company managed to bump profit up by 16%. But in comparison, EPS only increased by 10% 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 it will certainly be a positive for shareholders if AhnLab can grow EPS persistently. 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 AhnLab.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that AhnLab's profit was boosted by unusual items worth ₩6.9b 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. Which is hardly surprising, given the name. If AhnLab 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 AhnLab's Profit Performance

In its last report AhnLab benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. And furthermore, it went and issued plenty of new shares, ensuring that each shareholder (who did not tip more money in) now owns a smaller proportion of the company. For the reasons mentioned above, we think that a perfunctory glance at AhnLab's statutory profits might make it look better than it really is on an underlying level. If you'd like to know more about AhnLab as a business, it's important to be aware of any risks it's facing. For example - AhnLab has 1 warning sign we think you should be aware of.

Our examination of AhnLab 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. 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.