Are Hebei Construction Group’s (HKG:1727) Statutory Earnings A Good Guide To Its Underlying Profitability?

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. That said, the current statutory profit is not always a good guide to a company’s underlying profitability. In this article, we’ll look at how useful this year’s statutory profit is, when analysing Hebei Construction Group (HKG:1727).

While Hebei Construction Group was able to generate revenue of CN¥47.3b in the last twelve months, we think its profit result of CN¥797.2m was more important. Happily, it has grown both its profit and revenue over the last three years (though we note its profit is down over the last year).

Check out our latest analysis for Hebei Construction Group

SEHK:1727 Income Statement, December 15th 2019
SEHK:1727 Income Statement, December 15th 2019

Importantly, statutory profits are not always the best tool for understanding a company’s true earnings power, so it’s well worth examining profits in a little more detail. Therefore, today we will consider the nature of Hebei Construction Group’s statutory earnings with reference to its dilution of shareholders and the impact of unusual items. 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.

To understand the value of a company’s earnings growth, it is imperative to consider any dilution of shareholders’ interests. In fact, Hebei Construction Group increased the number of shares on issue by 14% over the last twelve months by issuing new shares. 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 Hebei Construction Group’s historical EPS growth by clicking on this link.

A Look At The Impact Of Hebei Construction Group’s Dilution on Its Earnings Per Share (EPS).

Hebei Construction Group has improved its profit over the last three years, with an annualized gain of 3.4% in that time. But on the other hand, earnings per share actually fell by 30% per year. Net income was down 42% over the last twelve months. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 49%. So you can see that the dilution has had a bit of an impact on shareholders.Therefore, the dilution is having a noteworthy influence on shareholder returnsAnd so, you can see quite clearly that dilution is influencing shareholder earnings.

If Hebei Construction 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 that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company’s share price might grow.

How Do Unusual Items Influence Profit?

Alongside that dilution, it’s also important to note that Hebei Construction Group’s profit suffered from unusual items, which reduced profit by CN¥230m in the last twelve months. It’s never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that’s hardly a surprise given these line items are considered unusual. If Hebei Construction Group doesn’t see those unusual expenses repeat, then all else being equal we’d expect its profit to increase over the coming year.

Our Take On Hebei Construction Group’s Profit Performance

Hebei Construction Group suffered from unusual items which depressed its profit in its last report; if that is not repeated then profit should be higher, all else being equal. But on the other hand, the company issued more shares, so without buying more shares each shareholder will end up with a smaller part of the profit. Given the contrasting considerations, we’re don’t have a strong view as to whether Hebei Construction Group’s profits are an apt reflection of its underlying potential for profit. While it’s really important to consider how well a company’s statutory earnings represent its true earnings power, it’s also worth taking a look at what analysts are forecasting for the future. So feel free to check out our free graph representing analyst forecasts.

Our examination of Hebei Construction Group has focussed on certain factors that can make its earnings look better than they are. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.