Hubei Yihua Chemical Industry's (SZSE:000422) Shareholders Have More To Worry About Than Only Soft Earnings

The market wasn't impressed with the soft earnings from Hubei Yihua Chemical Industry Co., Ltd. (SZSE:000422) recently. We did some further digging and think they have a few more reasons to be concerned beyond the statutory profit.

View our latest analysis for Hubei Yihua Chemical Industry

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Hubei Yihua Chemical Industry issued 18% more new shares over the last year. That means its earnings are split among a greater number of shares. 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. You can see a chart of Hubei Yihua Chemical Industry's EPS by clicking here.

How Is Dilution Impacting Hubei Yihua Chemical Industry's Earnings Per Share (EPS)?

Hubei Yihua Chemical Industry has improved its profit over the last three years, with an annualized gain of 115% in that time. But EPS was only up 100% per year, in the exact same period. Net profit actually dropped by 79% in the last year. But the EPS result was even worse, with the company recording a decline of 81%. So you can see that the dilution has had a bit of an impact on shareholders.

If Hubei Yihua Chemical Industry's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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 Hubei Yihua Chemical Industry's Profit Performance

Hubei Yihua Chemical Industry issued shares during the year, and that means its EPS performance lags its net income growth. Therefore, it seems possible to us that Hubei Yihua Chemical Industry's true underlying earnings power is actually less than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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 Hubei Yihua Chemical Industry at this point in time. In terms of investment risks, we've identified 4 warning signs with Hubei Yihua Chemical Industry, and understanding these should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Hubei Yihua Chemical Industry'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. 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 that insiders are buying 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.