There May Be Underlying Issues With The Quality Of Patec Precision Industry's (TWSE:2236) Earnings

Patec Precision Industry Co., Ltd. (TWSE:2236) 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 Patec Precision Industry

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Patec Precision Industry expanded the number of shares on issue by 8.8% 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 Patec Precision Industry's EPS by clicking here.

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

As you can see above, Patec Precision Industry has been growing its net income over the last few years, with an annualized gain of 342% over three years. And the 86% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 83% in that time. 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 Patec Precision Industry 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 Patec Precision Industry.

Our Take On Patec Precision Industry's Profit Performance

Each Patec Precision Industry 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 Patec Precision Industry's statutory profits are better than its underlying earnings power. But the good news is that its EPS growth over the last three years has been very impressive. 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. If you want to do dive deeper into Patec Precision Industry, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 2 warning signs for Patec Precision Industry and you'll want to know about them.

This note has only looked at a single factor that sheds light on the nature of Patec Precision Industry's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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.

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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.