Broadly speaking, profitable businesses are less risky than unprofitable ones. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. This article will consider whether Zhejiang New Century Hotel Management‘s (HKG:1158) statutory profits are a good guide to its underlying earnings.
It’s good to see that over the last twelve months Zhejiang New Century Hotel Management made a profit of CN¥189.3m on revenue of CN¥1.87b. In the chart below, you can see that its profit and revenue have both grown over the last three years.
Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. In this article we will consider how Zhejiang New Century Hotel Management’s decision to issue new shares in the company has impacted returns to shareholders. 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, Zhejiang New Century Hotel Management increased the number of shares on issue by 10% 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. You can see a chart of Zhejiang New Century Hotel Management’s EPS by clicking here.
How Is Dilution Impacting Zhejiang New Century Hotel Management’s Earnings Per Share? (EPS)
As you can see above, Zhejiang New Century Hotel Management has been growing its net income over the last few years, with an annualized gain of 232% over three years. But EPS was only up 201% per year, in the exact same period. And in the last year the company managed to bump profit up by 8.3%. Meanwhile, EPS was flat over the same period. 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.
In the long term, if Zhejiang New Century Hotel Management’s earnings per share can increase, then the share price should too. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. 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.
Our Take On Zhejiang New Century Hotel Management’s Profit Performance
Zhejiang New Century Hotel Management shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Therefore, it seems possible to us that Zhejiang New Century Hotel Management’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. 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. 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. Luckily, you can check out what analysts are forecsting by clicking here.
Today we’ve zoomed in on a single data point to better understand the nature of Zhejiang New Century Hotel Management’s profit. 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 email@example.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.