Should You Use East Tender Optoelectronics's (GTSM:6588) Statutory Earnings To Analyse It?

Broadly speaking, profitable businesses are less risky than unprofitable ones. 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 East Tender Optoelectronics (GTSM:6588).

It's good to see that over the last twelve months East Tender Optoelectronics made a profit of NT$62.2m on revenue of NT$364.8m. The chart below shows that both revenue and profit have declined over the last three years.

Check out our latest analysis for East Tender Optoelectronics

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 East Tender Optoelectronics' 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 East Tender Optoelectronics.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, East Tender Optoelectronics issued 15% more new shares 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. Check out East Tender Optoelectronics' historical EPS growth by clicking on this link.

A Look At The Impact Of East Tender Optoelectronics' Dilution on Its Earnings Per Share (EPS).

East Tender Optoelectronics' net profit dropped by 61% per year over the last three years. The good news is that profit was up 37% in the last twelve months. On the other hand, earnings per share are only up 32% 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 it will certainly be a positive for shareholders if East Tender Optoelectronics can grow EPS persistently. 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 East Tender Optoelectronics' Profit Performance

East Tender Optoelectronics shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Therefore, it seems possible to us that East Tender Optoelectronics' true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 32% EPS growth in the last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For instance, we've identified 4 warning signs for East Tender Optoelectronics (1 is concerning) you should be familiar with.

Today we've zoomed in on a single data point to better understand the nature of East Tender Optoelectronics' profit. 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. 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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