Guangzhou Wondfo BiotechLtd's (SZSE:300482) Solid Earnings May Rest On Weak Foundations

Guangzhou Wondfo Biotech Co.,Ltd (SZSE:300482) just released a solid earnings report, and the stock displayed some strength. While the profit numbers were good, our analysis has found some concerning factors that shareholders should be aware of.

See our latest analysis for Guangzhou Wondfo BiotechLtd

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Guangzhou Wondfo BiotechLtd issued 6.2% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. 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 27% per year over the last three years. But over the last year profit has held pretty steady. While EPS growth was also fairly flat, it was a bit worse than profit growth. So you can see that the dilution has had a bit of an impact on shareholders.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Guangzhou Wondfo BiotechLtd 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.

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.

How Do Unusual Items Influence Profit?

Finally, we should also consider the fact that unusual items boosted Guangzhou Wondfo BiotechLtd's net profit by CN¥51m over the last year. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. Which is hardly surprising, given the name. 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. And furthermore, it went and issued plenty of new shares, ensuring that each shareholder (who did not tip more money in) now owns a smaller proportion of the company. Considering all this we'd argue Guangzhou Wondfo BiotechLtd's profits probably give an overly generous impression of its sustainable level of profitability. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. You'd be interested to know, that we found 2 warning signs for Guangzhou Wondfo BiotechLtd and you'll want to know about these.

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 are plenty of other ways to inform your opinion of a company. 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.