Quintain Steel's (TWSE:2017) Anemic Earnings Might Be Worse Than You Think

Despite Quintain Steel Co., LTD.'s (TWSE:2017) recent earnings report having lackluster headline numbers, the market responded positively. We think that shareholders might be missing some concerning factors that our analysis found.

See our latest analysis for Quintain Steel

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Quintain Steel issued 19% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. 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. You can see a chart of Quintain Steel's EPS by clicking here.

How Is Dilution Impacting Quintain Steel's Earnings Per Share (EPS)?

Quintain Steel's net profit dropped by 77% per year over the last three years. Even looking at the last year, profit was still down 66%. Sadly, earnings per share fell further, down a full 69% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.

If Quintain Steel's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Quintain Steel.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that Quintain Steel's profit was boosted by unusual items worth NT$51m 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. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. Which is hardly surprising, given the name. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Quintain Steel's Profit Performance

To sum it all up, Quintain Steel got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. On top of that, the dilution means that its earnings per share performance is worse than its profit performance. For the reasons mentioned above, we think that a perfunctory glance at Quintain Steel's statutory profits might make it look better than it really is on an underlying level. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. To that end, you should learn about the 4 warning signs we've spotted with Quintain Steel (including 1 which is potentially serious).

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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 with high insider ownership.

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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.