MDS Tech's (KOSDAQ:086960) Promising Earnings May Rest On Soft Foundations

Last week's profit announcement from MDS Tech Inc. (KOSDAQ:086960) was underwhelming for investors, despite headline numbers being robust. We think that the market might be paying attention to some underlying factors that they find to be concerning.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. MDS Tech expanded the number of shares on issue by 6.0% 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. Check out MDS Tech's historical EPS growth by clicking on this link.

A Look At The Impact Of MDS Tech's Dilution On Its Earnings Per Share (EPS)

Three years ago, MDS Tech lost money. On the bright side, in the last twelve months it grew profit by 384%. But EPS was less impressive, up only 353% in that time. 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 MDS Tech shareholders will want to see that EPS figure continue to increase. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. 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 MDS Tech.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted MDS Tech's net profit by ₩771m over the last year. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. 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. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On MDS Tech's Profit Performance

In its last report MDS Tech benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. 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 MDS Tech's statutory profits might make it look better than it really is on an underlying level. If you'd like to know more about MDS Tech as a business, it's important to be aware of any risks it's facing. When we did our research, we found 3 warning signs for MDS Tech (1 is concerning!) that we believe deserve your full attention.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.