The market wasn't impressed with the soft earnings from Hubei Yihua Chemical Industry Co., Ltd. (SZSE:000422) recently. Our analysis has found some reasons to be concerned, beyond the weak headline numbers.
In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Hubei Yihua Chemical Industry increased the number of shares on issue by 18% over the last twelve months by issuing new shares. 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 Hubei Yihua Chemical Industry's EPS by clicking here.
A Look At The Impact Of Hubei Yihua Chemical Industry's Dilution On Its Earnings Per Share (EPS)
As you can see above, Hubei Yihua Chemical Industry has been growing its net income over the last few years, with an annualized gain of 115% over three years. But EPS was only up 100% per year, in the exact same period. Net income was down 79% over the last twelve months. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 81%. So you can see that the dilution has had a bit of an impact on shareholders.
In the long term, if Hubei Yihua Chemical Industry's earnings per share can increase, then the share price should too. 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.
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 Hubei Yihua Chemical Industry's Profit Performance
Over the last year Hubei Yihua Chemical Industry issued new shares and so, there's a noteworthy divergence between EPS and net income growth. Because of this, we think that it may be that Hubei Yihua Chemical Industry's statutory profits are better than its underlying earnings power. But the good news is that its EPS growth over the last three years has been very impressive. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example - Hubei Yihua Chemical Industry has 4 warning signs we think you should be aware of.
This note has only looked at a single factor that sheds light on the nature of Hubei Yihua Chemical Industry's 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. 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.