The healthy profit announcement from ASL Marine Holdings Ltd. (SGX:A04 ) didn't seem to impress investors. Our analysis has found some underlying factors which may be cause for concern.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, ASL Marine Holdings increased the number of shares on issue by 51% 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 ASL Marine Holdings' historical EPS growth by clicking on this link.

How Is Dilution Impacting ASL Marine Holdings' Earnings Per Share (EPS)?

Three years ago, ASL Marine Holdings lost money. On the bright side, in the last twelve months it grew profit by 11%. But EPS was less impressive, up only 4.0% in that time. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if ASL Marine 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 the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

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

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that ASL Marine Holdings' profit was boosted by unusual items worth S$6.2m in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. 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 ASL Marine Holdings' Profit Performance

In its last report ASL Marine 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 ASL Marine Holdings' statutory profits might make it look better than it really is on an underlying level. If you'd like to know more about ASL Marine Holdings as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 4 warning signs for ASL Marine Holdings (of which 2 are significant!) 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. 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 with high insider ownership.

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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.