We Like The Quality Of IKKA Holdings (Cayman)'s (TWSE:2250) Earnings

IKKA Holdings (Cayman) Limited's (TWSE:2250) solid earnings announcement recently didn't do much to the stock price. We did some analysis to find out why and believe that investors might be missing some encouraging factors contained in the earnings.

See our latest analysis for IKKA Holdings (Cayman)

Zooming In On 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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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 -0.19 for the year to December 2023. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of NT$364m during the period, dwarfing its reported profit of NT$119.2m. 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).

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, IKKA Holdings (Cayman) increased the number of shares on issue by 6.7% 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. Check out IKKA Holdings (Cayman)'s historical EPS growth by clicking on this link.

A Look At The Impact Of IKKA Holdings (Cayman)'s Dilution On Its 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 11% over three years. In contrast, earnings per share were actually down by 22% per year, in the exact same period. And at a glance the 22% gain in profit over the last year impresses. On the other hand, earnings per share are only up 15% in that time. So you can see that the dilution has had a bit of an impact on shareholders.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So IKKA Holdings (Cayman) shareholders will want to see that EPS figure continue to increase. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

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. Considering all the aforementioned, we'd venture that IKKA Holdings (Cayman)'s profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. If you'd like to know more about IKKA Holdings (Cayman) as a business, it's important to be aware of any risks it's facing. For example, IKKA Holdings (Cayman) has 4 warning signs (and 1 which can't be ignored) we think 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 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.