Yik Wo International Holdings Limited (HKG:8659) announced strong profits, but the stock was stagnant. We did some digging, and we found some concerning factors in the details.

See our latest analysis for Yik Wo International Holdings

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Yik Wo International Holdings increased the number of shares on issue by 25% 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. Check out Yik Wo International Holdings' historical EPS growth by clicking on this link.

How Is Dilution Impacting Yik Wo International Holdings' Earnings Per Share (EPS)?

As you can see above, Yik Wo International Holdings has been growing its net income over the last few years, with an annualized gain of 63% over three years. But EPS was only up 19% per year, in the exact same period. And at a glance the 32% gain in profit over the last year impresses. On the other hand, earnings per share are only up 27% in that time. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if Yik Wo International Holdings 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Yik Wo International Holdings.

Our Take On Yik Wo International Holdings' Profit Performance

Each Yik Wo International Holdings share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Because of this, we think that it may be that Yik Wo International Holdings' statutory profits are better than its underlying earnings power. Nonetheless, it's still worth noting that its earnings per share have grown at 19% over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing Yik Wo International Holdings at this point in time. For example - Yik Wo International Holdings has 4 warning signs we think you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Yik Wo International Holdings' 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.