Should You Rely On Information Technology Total Services's (GTSM:6697) Earnings Growth?

By
Simply Wall St
Published
December 10, 2020

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. In this article, we'll look at how useful this year's statutory profit is, when analysing Information Technology Total Services (GTSM:6697).

While Information Technology Total Services was able to generate revenue of NT$1.13b in the last twelve months, we think its profit result of NT$65.2m was more important. The chart below shows that revenue has been pretty flat over the last three years, but profit has increased.

View our latest analysis for Information Technology Total Services

GTSM:6697 Earnings and Revenue History December 10th 2020

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. In this article we will consider how Information Technology Total Services' decision to issue new shares in the company has impacted returns to shareholders. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Information Technology Total Services.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Information Technology Total Services expanded the number of shares on issue by 7.5% over the last year. That means its earnings are split among a greater number of shares. 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 Information Technology Total Services' EPS by clicking here.

How Is Dilution Impacting Information Technology Total Services' Earnings Per Share? (EPS)

Information Technology Total Services has improved its profit over the last three years, with an annualized gain of 42% in that time. In comparison, earnings per share only gained 5.4% over the same period. And the 21% profit boost in the last year certainly seems impressive at first glance. Meanwhile, EPS was flat over the same period. So you can see that the dilution has had a bit of an impact on shareholders. Therefore, the dilution is having a noteworthy influence on shareholder returns. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, earnings per share growth should beget share price growth. So Information Technology Total Services 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 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 Information Technology Total Services' Profit Performance

Each Information Technology Total Services share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Therefore, it seems possible to us that Information Technology Total Services' true underlying earnings power is actually less than its statutory profit. Nonetheless, it's still worth noting that its earnings per share have grown at 5.4% over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. 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. Case in point: We've spotted 3 warning signs for Information Technology Total Services you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Information Technology Total Services' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. 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. 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.
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