Hunan Haili Chemical Industry Co., Ltd. (SHSE:600731) just reported some strong earnings, and the market reacted accordingly with a healthy uplift in the share price. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.
See our latest analysis for Hunan Haili Chemical Industry
In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, Hunan Haili Chemical Industry issued 21% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. 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 Hunan Haili Chemical Industry's EPS by clicking here.
How Is Dilution Impacting Hunan Haili Chemical Industry's Earnings Per Share (EPS)?
Hunan Haili Chemical Industry has improved its profit over the last three years, with an annualized gain of 153% in that time. And at a glance the 37% gain in profit over the last year impresses. On the other hand, earnings per share are only up 40% in that time. So you can see that the dilution has had a bit of an impact on shareholders.
In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Hunan Haili Chemical Industry 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.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Hunan Haili Chemical Industry.
Our Take On Hunan Haili Chemical Industry's Profit Performance
Hunan Haili Chemical Industry shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Because of this, we think that it may be that Hunan Haili Chemical Industry's statutory profits are better than its underlying earnings power. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you'd like to know more about Hunan Haili Chemical Industry as a business, it's important to be aware of any risks it's facing. For example - Hunan Haili Chemical Industry has 1 warning sign we think you should be aware of.
Today we've zoomed in on a single data point to better understand the nature of Hunan Haili Chemical Industry's profit. But there are plenty of other ways to inform your opinion of a company. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
