Solid Earnings Reflect IKKA Holdings (Cayman)'s (TWSE:2250) Strength As A Business

Even though IKKA Holdings (Cayman) Limited (TWSE:2250 ) posted strong earnings, investors appeared to be underwhelmed. We did some digging and actually think they are being unnecessarily pessimistic.

Check out our latest analysis for IKKA Holdings (Cayman)

A Closer Look At IKKA Holdings (Cayman)'s Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

IKKA Holdings (Cayman) has an accrual ratio of -0.14 for the year to September 2024. That indicates that its free cash flow was a fair bit more than its statutory profit. Indeed, in the last twelve months it reported free cash flow of NT$376m, well over the NT$198.1m it reported in profit. IKKA Holdings (Cayman) shareholders are no doubt pleased that free cash flow improved over the last twelve months. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of IKKA Holdings (Cayman).

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, IKKA Holdings (Cayman) issued 6.7% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. 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 IKKA Holdings (Cayman)'s EPS by clicking here.

How Is Dilution Impacting IKKA Holdings (Cayman)'s Earnings Per Share (EPS)?

As you can see above, IKKA Holdings (Cayman) has been growing its net income over the last few years, with an annualized gain of 29% over three years. In comparison, earnings per share only gained 0.3% over the same period. And the 82% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 65% in that time. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if IKKA Holdings (Cayman) can grow EPS persistently. 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.

Our Take On IKKA Holdings (Cayman)'s Profit Performance

In conclusion, IKKA Holdings (Cayman) has strong cashflow relative to earnings, which indicates good quality earnings, but the dilution means its earnings per share growth is weaker than its profit growth. After taking into account all these factors, we think that IKKA Holdings (Cayman)'s statutory results are a decent reflection of its underlying earnings power. If you want to do dive deeper into IKKA Holdings (Cayman), you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 3 warning signs for IKKA Holdings (Cayman) you should know about.

Our examination of IKKA Holdings (Cayman) has focussed on certain factors that can make its earnings look better than they are. 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. 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.

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.