UMS Holdings Limited's (SGX:558) recent weak earnings report didn't cause a big stock movement. We think that investors are worried about some weaknesses underlying the earnings.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. UMS Holdings expanded the number of shares on issue by 6.0% over the last year. As a result, its net income is now split between a greater number of shares. 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 UMS Holdings' EPS by clicking here.

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

As you can see above, UMS Holdings has been growing its net income over the last few years, with an annualized gain of 64% over three years. Net profit actually dropped by 39% in the last year. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 39%. So you can see that the dilution has had a bit of an impact on shareholders.

If UMS Holdings' 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.

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.

Our Take On UMS Holdings' Profit Performance

UMS Holdings issued shares during the year, and that means its EPS performance lags its net income growth. Therefore, it seems possible to us that UMS Holdings' true underlying earnings power is actually less than its statutory profit. Nonetheless, it's still worth noting that its earnings per share have grown at 64% over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example, we've discovered 2 warning signs that you should run your eye over to get a better picture of UMS Holdings.

Today we've zoomed in on a single data point to better understand the nature of UMS Holdings' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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.