Sigurd Microelectronics' (TWSE:6257) Earnings Are Of Questionable Quality

Despite announcing strong earnings, Sigurd Microelectronics Corporation's (TWSE:6257) stock was sluggish. We think that the market might be paying attention to some underlying factors that they find to be concerning.

Check out our latest analysis for Sigurd Microelectronics

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, Sigurd Microelectronics increased the number of shares on issue by 5.8% over the last twelve months by issuing new shares. As a result, its net income is now split between 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 Sigurd Microelectronics' EPS by clicking here.

A Look At The Impact Of Sigurd Microelectronics' Dilution On Its Earnings Per Share (EPS)

Unfortunately, Sigurd Microelectronics' profit is down 13% per year over three years. On the bright side, in the last twelve months it grew profit by 31%. On the other hand, earnings per share are only up 29% over the same period. 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 Sigurd Microelectronics 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 the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that Sigurd Microelectronics' profit was boosted by unusual items worth NT$211m 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. And that's as you'd expect, given these boosts are described as 'unusual'. If Sigurd Microelectronics 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 Sigurd Microelectronics' Profit Performance

To sum it all up, Sigurd Microelectronics 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 Sigurd Microelectronics' profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into Sigurd Microelectronics, you'd also look into what risks it is currently facing. While conducting our analysis, we found that Sigurd Microelectronics has 2 warning signs and it would be unwise to ignore these.

Our examination of Sigurd Microelectronics 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 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. 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.