Dancomech Holdings Berhad's (KLSE:DANCO) Solid Earnings May Rest On Weak Foundations

The market shrugged off Dancomech Holdings Berhad's (KLSE:DANCO) solid earnings report. We think that investors might be worried about some concerning underlying factors.

See our latest analysis for Dancomech Holdings Berhad

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Dancomech Holdings Berhad increased the number of shares on issue by 7.0% over the last twelve months by issuing new shares. That means its earnings are split among 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. You can see a chart of Dancomech Holdings Berhad's EPS by clicking here.

A Look At The Impact Of Dancomech Holdings Berhad's Dilution on Its Earnings Per Share (EPS).

As you can see above, Dancomech Holdings Berhad has been growing its net income over the last few years, with an annualized gain of 36% over three years. And at a glance the 31% gain in profit over the last year impresses. But in comparison, EPS only increased by 29% over the same period. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Dancomech Holdings Berhad 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 Dancomech Holdings Berhad.

Our Take On Dancomech Holdings Berhad's Profit Performance

Each Dancomech Holdings Berhad share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Because of this, we think that it may be that Dancomech Holdings Berhad's statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 32% per annum growth in EPS for the last three. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Every company has risks, and we've spotted 4 warning signs for Dancomech Holdings Berhad you should know about.

Today we've zoomed in on a single data point to better understand the nature of Dancomech Holdings Berhad'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 that insiders are buying to be useful.

If you’re looking to trade a wide range of investments, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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