Mekdam Holding Group - Q.P.S.C's (DSM:MKDM) Profits Appear To Have Quality Issues

The recent earnings posted by Mekdam Holding Group - Q.P.S.C. (DSM:MKDM) were solid, but the stock didn't move as much as we expected. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

See our latest analysis for Mekdam Holding Group - Q.P.S.C

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Mekdam Holding Group - Q.P.S.C expanded the number of shares on issue by 40% 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 Mekdam Holding Group - Q.P.S.C's historical EPS growth by clicking on this link.

A Look At The Impact Of Mekdam Holding Group - Q.P.S.C's Dilution On Its Earnings Per Share (EPS)

As you can see above, Mekdam Holding Group - Q.P.S.C has been growing its net income over the last few years, with an annualized gain of 54% over three years. But EPS was only up 37% per year, in the exact same period. And over the last 12 months, the company grew its profit by 5.9%. But earnings per share are actually down 5.8%, over the last twelve months. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

If Mekdam Holding Group - Q.P.S.C'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 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 Mekdam Holding Group - Q.P.S.C.

Our Take On Mekdam Holding Group - Q.P.S.C's Profit Performance

As we discussed above, Mekdam Holding Group - Q.P.S.C's dilution over the last year has a major impact on its per-share earnings. For this reason, we think that Mekdam Holding Group - Q.P.S.C's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. Nonetheless, it's still worth noting that its earnings per share have grown at 37% over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. In terms of investment risks, we've identified 1 warning sign with Mekdam Holding Group - Q.P.S.C, and understanding it should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Mekdam Holding Group - Q.P.S.C'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. 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. 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.