Why United Super Markets Holdings' (TSE:3222) Healthy Earnings Aren’t As Good As They Seem

Following the release of a positive earnings report recently, United Super Markets Holdings Inc.'s (TSE:3222) stock performed well. Despite this, we feel that there are some reasons to be cautious with these earnings.

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One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, United Super Markets Holdings increased the number of shares on issue by 52% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. 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. Check out United Super Markets Holdings' historical EPS growth by clicking on this link.

A Look At The Impact Of United Super Markets Holdings' Dilution On Its Earnings Per Share (EPS)

Unfortunately, United Super Markets Holdings' profit is down 85% per year over three years. Even looking at the last year, profit was still down 20%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 31% in the same period. So you can see that the dilution has had a fairly significant impact on shareholders.

If United Super Markets Holdings' EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. 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.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that United Super Markets Holdings' profit was boosted by unusual items worth JP¥763m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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'. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On United Super Markets Holdings' Profit Performance

In its last report United Super Markets Holdings benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. 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. For the reasons mentioned above, we think that a perfunctory glance at United Super Markets Holdings' statutory profits might make it look better than it really is on an underlying level. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example, United Super Markets Holdings has 3 warning signs (and 2 which can't be ignored) we think you should know about.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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 with significant insider holdings to be useful.

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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.