We Think That There Are Some Issues For Guangdong Kingstrong Technology (SZSE:300629) Beyond Its Promising Earnings

Guangdong Kingstrong Technology Co., Ltd.'s (SZSE:300629) robust recent earnings didn't do much to move the stock. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.

Check out our latest analysis for Guangdong Kingstrong Technology

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Guangdong Kingstrong Technology issued 5.3% more new shares 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 Guangdong Kingstrong Technology's EPS by clicking here.

How Is Dilution Impacting Guangdong Kingstrong Technology's Earnings Per Share (EPS)?

As you can see above, Guangdong Kingstrong Technology has been growing its net income over the last few years, with an annualized gain of 65% over three years. In comparison, earnings per share only gained 54% over the same period. However, net income was pretty flat over the last year with a miniscule increase. Meanwhile, EPS was actually down a full 2.7% over the period, highlighting just how different the profits look from a per-share perspective. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, if Guangdong Kingstrong Technology'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 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 Guangdong Kingstrong Technology.

Our Take On Guangdong Kingstrong Technology's Profit Performance

Each Guangdong Kingstrong Technology share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Therefore, it seems possible to us that Guangdong Kingstrong Technology's true underlying earnings power is actually less than its statutory profit. Nonetheless, it's still worth noting that its earnings per share have grown at 54% over the last three years. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. At Simply Wall St, we found 1 warning sign for Guangdong Kingstrong Technology and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Guangdong Kingstrong Technology's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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 with significant insider holdings to be useful.

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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.