HMMLtd's (KRX:011200) Earnings Are Weaker Than They Seem

HMM Co.,Ltd (KRX:011200) just reported some strong earnings, and the market reacted accordingly with a healthy uplift in the share price. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.

Check out our latest analysis for HMMLtd

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. HMMLtd expanded the number of shares on issue by 28% over the last year. As a result, its net income is now split between a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out HMMLtd's historical EPS growth by clicking on this link.

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

As you can see above, HMMLtd has been growing its net income over the last few years, with an annualized gain of 13% over three years. In contrast, earnings per share were actually down by 41% per year, in the exact same period. And at a glance the 40% gain in profit over the last year impresses. On the other hand, earnings per share are only up 6.0% in that time. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So HMMLtd 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 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.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On HMMLtd's Profit Performance

HMMLtd shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Therefore, it seems possible to us that HMMLtd's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 6.0% EPS growth in the last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For instance, we've identified 3 warning signs for HMMLtd (1 is significant) you should be familiar with.

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