Guizhou TyreLtd's (SZSE:000589) Promising Earnings May Rest On Soft Foundations

Guizhou Tyre Co.,Ltd.'s (SZSE:000589) stock was strong after they recently reported robust earnings. However, we think that shareholders may be missing some concerning details in the numbers.

See our latest analysis for Guizhou TyreLtd

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Guizhou TyreLtd increased the number of shares on issue by 27% 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 Guizhou TyreLtd's historical EPS growth by clicking on this link.

How Is Dilution Impacting Guizhou TyreLtd's Earnings Per Share (EPS)?

Unfortunately, Guizhou TyreLtd's profit is down 27% per year over three years. The good news is that profit was up 94% in the last twelve months. On the other hand, earnings per share are only up 92% over the same period. So you can see that the dilution has had a fairly significant impact on shareholders.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if Guizhou TyreLtd 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 Guizhou TyreLtd.

Our Take On Guizhou TyreLtd's Profit Performance

Guizhou TyreLtd 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 Guizhou TyreLtd's statutory profits are better than its underlying earnings power. But the happy news is that, while acknowledging we have to look beyond the statutory numbers, those numbers are still improving, with EPS growing at a very high rate over the last year. 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. If you want to do dive deeper into Guizhou TyreLtd, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 2 warning signs for Guizhou TyreLtd you should know about.

Today we've zoomed in on a single data point to better understand the nature of Guizhou TyreLtd'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.

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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.