Here’s Why We Don’t Think Tianjin Tianbao Energy’s (HKG:1671) Statutory Earnings Reflect Its Underlying Earnings Potential

As a general rule, we think profitable companies are less risky than companies that lose money. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it’s not always clear whether statutory profits are a good guide, going forward. In this article, we’ll look at how useful this year’s statutory profit is, when analysing Tianjin Tianbao Energy (HKG:1671).

It’s good to see that over the last twelve months Tianjin Tianbao Energy made a profit of CN¥17.7m on revenue of CN¥402.8m. The chart below shows that both revenue and profit have declined over the last three years.

See our latest analysis for Tianjin Tianbao Energy

SEHK:1671 Income Statement, January 1st 2020
SEHK:1671 Income Statement, January 1st 2020

Not all profits are equal, and we can learn more about the nature of a company’s past profitability by diving deeper into the financial statements. In this article we will consider how Tianjin Tianbao Energy’s decision to issue new shares in the company has impacted returns to shareholders. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Tianjin Tianbao Energy.

To understand the value of a company’s earnings growth, it is imperative to consider any dilution of shareholders’ interests. Tianjin Tianbao Energy expanded the number of shares on issue by 31% over the last year. 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. You can see a chart of Tianjin Tianbao Energy’s EPS by clicking here.

How Is Dilution Impacting Tianjin Tianbao Energy’s Earnings Per Share? (EPS)

Unfortunately, Tianjin Tianbao Energy’s profit is down 68% per year over three years. And even focusing only on the last twelve months, we see profit is down 47%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 59% in the same period. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

In the long term, if Tianjin Tianbao Energy’s earnings per share can increase, then the share price should too. But on the other hand, we’d be far less excited to learn profit (but not EPS) was improving. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical “share” of the company’s profit.

Our Take On Tianjin Tianbao Energy’s Profit Performance

Over the last year Tianjin Tianbao Energy issued new shares and so, there’s a noteworthy divergence between EPS and net income growth. Therefore, it seems possible to us that Tianjin Tianbao Energy’s true underlying earnings power is actually less than its statutory profit. Sadly, its EPS was down over the last twelve months. 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. Just as investors must consider earnings, it is also important to take into account the strength of a company’s balance sheet. If you’re interestedwe have a graphic representation of Tianjin Tianbao Energy’s balance sheet.

This note has only looked at a single factor that sheds light on the nature of Tianjin Tianbao Energy’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.

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.