Guangxi LiuYao Group's (SHSE:603368) Earnings Are Weaker Than They Seem

Guangxi LiuYao Group Co., Ltd (SHSE:603368) just reported some strong earnings, and the market reacted accordingly with a healthy uplift in the share price. However, we think that shareholders may be missing some concerning details in the numbers.

Check out our latest analysis for Guangxi LiuYao Group

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, Guangxi LiuYao Group issued 9.9% 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. Check out Guangxi LiuYao Group's historical EPS growth by clicking on this link.

How Is Dilution Impacting Guangxi LiuYao Group's Earnings Per Share (EPS)?

As you can see above, Guangxi LiuYao Group has been growing its net income over the last few years, with an annualized gain of 21% over three years. And over the last 12 months, the company grew its profit by 20%. But in comparison, EPS only increased by 20% over the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, earnings per share growth should beget share price growth. So Guangxi LiuYao Group shareholders will want to see that EPS figure continue to increase. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. 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.

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.

Our Take On Guangxi LiuYao Group's Profit Performance

Each Guangxi LiuYao Group share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Because of this, we think that it may be that Guangxi LiuYao Group's statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 22% per annum growth in EPS for the last three. 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. So while earnings quality is important, it's equally important to consider the risks facing Guangxi LiuYao Group at this point in time. For example, Guangxi LiuYao Group has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

This note has only looked at a single factor that sheds light on the nature of Guangxi LiuYao Group'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. 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.