HMMLtd's (KRX:011200) Sluggish Earnings Might Be Just The Beginning Of Its Problems

Investors weren't pleased with the recent soft earnings report from HMM Co.,Ltd (KRX:011200). We did some digging and believe that things are better than they seem due to some encouraging factors.

See our latest analysis for HMMLtd

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, HMMLtd increased the number of shares on issue by 41% over the last twelve months by issuing new shares. That means its earnings are split among a greater number of shares. 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 HMMLtd's EPS by clicking here.

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

HMMLtd has improved its profit over the last three years, with an annualized gain of 330% in that time. But EPS was only up 143% per year, in the exact same period. Net income was down 85% over the last twelve months. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 87%. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

If HMMLtd's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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.

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.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that HMMLtd's profit suffered from unusual items, which reduced profit by ₩97b in the last twelve months. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. If HMMLtd doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On HMMLtd's Profit Performance

HMMLtd suffered from unusual items which depressed its profit in its last report; if that is not repeated then profit should be higher, all else being equal. But on the other hand, the company issued more shares, so without buying more shares each shareholder will end up with a smaller part of the profit. Having considered these factors, we don't think HMMLtd's statutory profits give an overly harsh view of the business. If you want to do dive deeper into HMMLtd, you'd also look into what risks it is currently facing. For example, we've found that HMMLtd has 4 warning signs (1 doesn't sit too well with us!) that deserve your attention before going any further with your analysis.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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 with high insider ownership.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.