As a general rule, we think profitable companies are less risky than companies that lose money. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it’s not always clear whether statutory profits are a good guide, going forward. This article will consider whether Arlitech Electronic’s (GTSM:6432) statutory profits are a good guide to its underlying earnings.
While Arlitech Electronic was able to generate revenue of NT$977.1m in the last twelve months, we think its profit result of NT$58.3m was more important. Happily, it has grown both its profit and revenue over the last three years (though we note its profit is down over the last year).
Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. In this article we will consider how Arlitech Electronic’s 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 Arlitech Electronic.
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Arlitech Electronic issued 11% 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 Arlitech Electronic’s EPS by clicking here.
A Look At The Impact Of Arlitech Electronic’s Dilution on Its Earnings Per Share (EPS).
Arlitech Electronic has improved its profit over the last three years, with an annualized gain of 484% in that time. But EPS was only up 423% per year, in the exact same period. Net profit actually dropped by 6.6% in the last year. But the EPS result was even worth, with the company recording a decline of 10%. 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.
If Arlitech Electronic’s EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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.
Our Take On Arlitech Electronic’s Profit Performance
Arlitech Electronic issued shares during the year, and that means its EPS performance lags its net income growth. Because of this, we think that it may be that Arlitech Electronic’s statutory profits are better than its underlying earnings power. But the good news is that its EPS growth over the last three years has been very impressive. 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. 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. While conducting our analysis, we found that Arlitech Electronic has 5 warning signs and it would be unwise to ignore these.
Today we’ve zoomed in on a single data point to better understand the nature of Arlitech Electronic’s 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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