Following the solid earnings report from Guizhou Chanhen Chemical Corporation (SZSE:002895), the market responded by bidding up the stock price. While the profit numbers were good, our analysis has found some concerning factors that shareholders should be aware of.
To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Guizhou Chanhen Chemical issued 8.0% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. 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 Guizhou Chanhen Chemical's EPS by clicking here.
How Is Dilution Impacting Guizhou Chanhen Chemical's Earnings Per Share (EPS)?
As you can see above, Guizhou Chanhen Chemical has been growing its net income over the last few years, with an annualized gain of 437% over three years. In comparison, earnings per share only gained 354% over the same period. While we did see a very small increase, net profit was basically flat over the last year. Earnings per share are pretty much flat, too over the last twelve months, but EPS growth came in below below net income growth. So you can see that the dilution has had a bit of an impact on shareholders.
If Guizhou Chanhen Chemical's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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 Guizhou Chanhen Chemical's Profit Performance
Each Guizhou Chanhen Chemical share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Therefore, it seems possible to us that Guizhou Chanhen Chemical's true underlying earnings power is actually less than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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. If you'd like to know more about Guizhou Chanhen Chemical as a business, it's important to be aware of any risks it's facing. While conducting our analysis, we found that Guizhou Chanhen Chemical has 2 warning signs and it would be unwise to ignore them.
This note has only looked at a single factor that sheds light on the nature of Guizhou Chanhen Chemical'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.