Sichuan Guoguang Agrochemical's (SZSE:002749) Promising Earnings May Rest On Soft Foundations

Sichuan Guoguang Agrochemical Co., Ltd.'s (SZSE:002749) robust earnings report didn't manage to move the market for its stock. Our analysis suggests that shareholders have noticed something concerning in the numbers.

See our latest analysis for Sichuan Guoguang Agrochemical

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, Sichuan Guoguang Agrochemical increased the number of shares on issue by 7.7% over the last twelve months by issuing new shares. 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 Sichuan Guoguang Agrochemical's historical EPS growth by clicking on this link.

A Look At The Impact Of Sichuan Guoguang Agrochemical's Dilution On Its Earnings Per Share (EPS)

Sichuan Guoguang Agrochemical has improved its profit over the last three years, with an annualized gain of 113% in that time. And at a glance the 147% gain in profit over the last year impresses. But in comparison, EPS only increased by 152% over the same period. 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 it will certainly be a positive for shareholders if Sichuan Guoguang Agrochemical can grow EPS persistently. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. 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 Sichuan Guoguang Agrochemical's Profit Performance

Sichuan Guoguang Agrochemical shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Because of this, we think that it may be that Sichuan Guoguang Agrochemical's statutory profits are better than its underlying earnings power. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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 if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Every company has risks, and we've spotted 2 warning signs for Sichuan Guoguang Agrochemical you should know about.

Today we've zoomed in on a single data point to better understand the nature of Sichuan Guoguang Agrochemical's profit. 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 with high insider ownership.

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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.