Why Triocean Industrial Corporation's (TWSE:1472) Earnings Are Weaker Than They Seem

Strong earnings weren't enough to please Triocean Industrial Corporation Co., Ltd.'s (TWSE:1472) shareholders over the last week. We did some digging and found some underlying numbers that are worrying.

Check out our latest analysis for Triocean Industrial Corporation

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Triocean Industrial Corporation expanded the number of shares on issue by 70% 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 Triocean Industrial Corporation's EPS by clicking here.

A Look At The Impact Of Triocean Industrial Corporation's Dilution On Its Earnings Per Share (EPS)

Three years ago, Triocean Industrial Corporation lost money. The good news is that profit was up 4,225% in the last twelve months. But EPS was less impressive, up only 3,152% in that time. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Triocean Industrial Corporation shareholders will want to see that EPS figure continue to increase. 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 Triocean Industrial Corporation.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that Triocean Industrial Corporation's profit was boosted by unusual items worth NT$19m in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. If Triocean Industrial Corporation doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Triocean Industrial Corporation's Profit Performance

To sum it all up, Triocean Industrial Corporation got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. And furthermore, it went and issued plenty of new shares, ensuring that each shareholder (who did not tip more money in) now owns a smaller proportion of the company. Considering all this we'd argue Triocean Industrial Corporation's profits probably give an overly generous impression of its sustainable level of profitability. So while earnings quality is important, it's equally important to consider the risks facing Triocean Industrial Corporation at this point in time. When we did our research, we found 2 warning signs for Triocean Industrial Corporation (1 can't be ignored!) that we believe deserve your full attention.

Our examination of Triocean Industrial Corporation has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. But there are plenty of other ways to inform your opinion of a company. 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.