The market for NORINCO International Cooperation Ltd.'s (SZSE:000065) stock was strong after it released a healthy earnings report last week. However, we think that shareholders should be cautious as we found some worrying factors underlying the profit.
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, NORINCO International Cooperation issued 11% more new shares over the last year. That means its earnings are split among 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. You can see a chart of NORINCO International Cooperation's EPS by clicking here.
How Is Dilution Impacting NORINCO International Cooperation's Earnings Per Share (EPS)?
As you can see above, NORINCO International Cooperation has been growing its net income over the last few years, with an annualized gain of 22% over three years. But on the other hand, earnings per share actually fell by 6.1% per year. And the 44% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 38% in that time. And so, you can see quite clearly that dilution is influencing shareholder earnings.
In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if NORINCO International Cooperation can grow EPS persistently. 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.
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 NORINCO International Cooperation's Profit Performance
Each NORINCO International Cooperation share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Therefore, it seems possible to us that NORINCO International Cooperation's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 38% EPS growth in the last year. 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. At Simply Wall St, we found 1 warning sign for NORINCO International Cooperation and we think they deserve your attention.
This note has only looked at a single factor that sheds light on the nature of NORINCO International Cooperation's profit. But there are plenty of other ways to inform your opinion of a company. 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.