It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. 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. In this article, we’ll look at how useful this year’s statutory profit is, when analysing Zijin Mining Group (HKG:2899).
We like the fact that Zijin Mining Group made a profit of CN¥4.85b on its revenue of CN¥152.0b, in the last year. Happily, it has grown both its profit and revenue over the last three years, as you can see in the chart below.
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. In this article we’ll look at how Zijin Mining Group is impacting shareholders by issuing new shares. 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.
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Zijin Mining Group increased the number of shares on issue by 10% over the last twelve months by issuing new shares. 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 Zijin Mining Group’s EPS by clicking here.
A Look At The Impact Of Zijin Mining Group’s Dilution on Its Earnings Per Share (EPS).
Zijin Mining Group has improved its profit over the last three years, with an annualized gain of 73% in that time. In comparison, earnings per share only gained 53% over the same period. And the 42% profit boost in the last year certainly seems impressive at first glance. But in comparison, EPS only increased by 33% 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 returns. And so, you can see quite clearly that dilution is influencing shareholder earnings.
Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Zijin Mining Group shareholders will want to see that EPS figure continue to increase. 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.
Our Take On Zijin Mining Group’s Profit Performance
Zijin Mining Group 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 Zijin Mining Group’s statutory profits are better than its underlying earnings power. Nonetheless, it’s still worth noting that its earnings per share have grown at 53% over the last three years. Of course, we’ve only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. Keep in mind, when it comes to analysing a stock it’s worth noting the risks involved. In terms of investment risks, we’ve identified 3 warning signs with Zijin Mining Group, and understanding them should be part of your investment process.
Today we’ve zoomed in on a single data point to better understand the nature of Zijin Mining Group’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. 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. 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.
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