SPT Energy Group Inc. (HKG:1251) announced strong profits, but the stock was stagnant. We did some digging, and we found some concerning factors in the details.
To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, SPT Energy Group increased the number of shares on issue by 5.4% over the last twelve months by issuing new shares. That means its earnings are split among 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. You can see a chart of SPT Energy Group's EPS by clicking here.
How Is Dilution Impacting SPT Energy Group's Earnings Per Share (EPS)?
Three years ago, SPT Energy Group lost money. On the bright side, in the last twelve months it grew profit by 26%. But EPS was less impressive, up only 22% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.
Changes in the share price do tend to reflect changes in earnings per share, in the long run. So SPT Energy Group shareholders will want to see that EPS figure continue to increase. 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 SPT Energy Group.
Our Take On SPT Energy Group's Profit Performance
Each SPT Energy 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 SPT Energy Group's statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 22% EPS growth in the last year. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Every company has risks, and we've spotted 3 warning signs for SPT Energy Group you should know about.
This note has only looked at a single factor that sheds light on the nature of SPT Energy Group's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.