Ko Yo Chemical (Group) Limited (HKG:827) announced strong profits, but the stock was stagnant. We did some digging, and we found some concerning factors in the details.

Check out our latest analysis for Ko Yo Chemical (Group)

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Ko Yo Chemical (Group) expanded the number of shares on issue by 9.8% over the last year. As a result, its net income is now split between a greater number of shares. 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 Ko Yo Chemical (Group)'s historical EPS growth by clicking on this link.

How Is Dilution Impacting Ko Yo Chemical (Group)'s Earnings Per Share (EPS)?

Ko Yo Chemical (Group) was losing money three years ago. The good news is that profit was up 2,807% in the last twelve months. But EPS was less impressive, up only 2,715% in that time. So you can see that the dilution has had a bit of an 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 Ko Yo Chemical (Group) can grow EPS persistently. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. 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 Ko Yo Chemical (Group).

How Do Unusual Items Influence Profit?

Finally, we should also consider the fact that unusual items boosted Ko Yo Chemical (Group)'s net profit by CN¥91m over the last year. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. 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. Which is hardly surprising, given the name. If Ko Yo Chemical (Group) doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Ko Yo Chemical (Group)'s Profit Performance

In its last report Ko Yo Chemical (Group) benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. On top of that, the dilution means that its earnings per share performance is worse than its profit performance. For the reasons mentioned above, we think that a perfunctory glance at Ko Yo Chemical (Group)'s statutory profits might make it look better than it really is on an underlying level. So while earnings quality is important, it's equally important to consider the risks facing Ko Yo Chemical (Group) at this point in time. For example, we've discovered 2 warning signs that you should run your eye over to get a better picture of Ko Yo Chemical (Group).

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. 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. 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.