Guangzhou Wondfo BiotechLtd's (SZSE:300482) Shareholders May Want To Dig Deeper Than Statutory Profit

Guangzhou Wondfo Biotech Co.,Ltd's (SZSE:300482) healthy profit numbers didn't contain any surprises for investors. However the statutory profit number doesn't tell the whole story, and we have found some factors which might be of concern to shareholders.

View our latest analysis for Guangzhou Wondfo BiotechLtd

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Guangzhou Wondfo BiotechLtd increased the number of shares on issue by 8.1% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. 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 Guangzhou Wondfo BiotechLtd's historical EPS growth by clicking on this link.

A Look At The Impact Of Guangzhou Wondfo BiotechLtd's Dilution On Its Earnings Per Share (EPS)

Guangzhou Wondfo BiotechLtd's net profit dropped by 25% per year over the last three years. The good news is that profit was up 47% in the last twelve months. On the other hand, earnings per share are only up 40% over the same period. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Guangzhou Wondfo BiotechLtd can grow EPS persistently. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

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.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that Guangzhou Wondfo BiotechLtd's profit was boosted by unusual items worth CN¥79m in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Guangzhou Wondfo BiotechLtd's Profit Performance

In its last report Guangzhou Wondfo BiotechLtd benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. On top of that, the dilution means that its earnings per share performance is worse than its profit performance. Considering all this we'd argue Guangzhou Wondfo BiotechLtd's profits probably give an overly generous impression of its sustainable level of profitability. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. In terms of investment risks, we've identified 2 warning signs with Guangzhou Wondfo BiotechLtd, and understanding these should be part of your investment process.

Our examination of Guangzhou Wondfo BiotechLtd has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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 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.