The recent earnings posted by Tongguan Gold Group Limited (HKG:340) were solid, but the stock didn't move as much as we expected. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Tongguan Gold Group expanded the number of shares on issue by 20% over the last year. 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 Tongguan Gold Group's historical EPS growth by clicking on this link.

How Is Dilution Impacting Tongguan Gold Group's Earnings Per Share (EPS)?

Three years ago, Tongguan Gold Group lost money. On the bright side, in the last twelve months it grew profit by 2.2%. But earnings per share are actually down 6.2%, over that same period. This is a great example of why it's rather imprudent to rely only on net income as a growth measure. Therefore, the dilution is having a noteworthy influence on shareholder returns.

If Tongguan Gold Group's 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 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 Tongguan Gold Group.

Our Take On Tongguan Gold Group's Profit Performance

Each Tongguan Gold Group share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Because of this, we think that it may be that Tongguan Gold Group's statutory profits are better than its underlying earnings power. Sadly, its EPS was down over the last twelve months. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. In terms of investment risks, we've identified 2 warning signs with Tongguan Gold Group, and understanding these bad boys should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Tongguan Gold Group'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.