There Are Some Reasons To Suggest That Inscobee's (KRX:006490) Earnings A Poor Reflection Of Profitability

Solid profit numbers didn't seem to be enough to please Inscobee., Inc.'s (KRX:006490) shareholders. Our analysis has found some concerning factors which weaken the profit's foundation.

View our latest analysis for Inscobee

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Inscobee expanded the number of shares on issue by 5.5% 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. You can see a chart of Inscobee's EPS by clicking here.

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

Three years ago, Inscobee lost money. Zooming in to the last year, we still can't talk about growth rates coherently, since it made a loss last year. 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. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, if Inscobee'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 Inscobee.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted Inscobee's net profit by ₩5.0b 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. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And that's as you'd expect, given these boosts are described as 'unusual'. Inscobee had a rather significant contribution from unusual items relative to its profit to December 2020. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Inscobee's Profit Performance

In its last report Inscobee 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 Inscobee's statutory profits might make it look better than it really is on an underlying level. If you'd like to know more about Inscobee as a business, it's important to be aware of any risks it's facing. For example, Inscobee has 4 warning signs (and 1 which is significant) we think you should know about.

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 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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