Investors Shouldn't Be Too Comfortable With Hubei Kailong Chemical Group's (SZSE:002783) Earnings

Despite posting some strong earnings, the market for Hubei Kailong Chemical Group Co., Ltd.'s (SZSE:002783) stock hasn't moved much. Our analysis suggests that shareholders have noticed something concerning in the numbers.

View our latest analysis for Hubei Kailong Chemical Group

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Hubei Kailong Chemical Group increased the number of shares on issue by 28% over the last twelve months by issuing new shares. 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. Check out Hubei Kailong Chemical Group's historical EPS growth by clicking on this link.

How Is Dilution Impacting Hubei Kailong Chemical Group's Earnings Per Share (EPS)?

We don't have any data on the company's profits from three years ago. The good news is that profit was up 31% in the last twelve months. On the other hand, earnings per share are only up 29% over the same period. And so, you can see quite clearly that dilution is having a rather significant 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 Hubei Kailong Chemical Group 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Hubei Kailong Chemical Group.

Our Take On Hubei Kailong Chemical Group's Profit Performance

Hubei Kailong Chemical Group 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 Hubei Kailong Chemical Group's statutory profits are better than its underlying earnings power. The good news is that, its earnings per share increased by 29% in the last year. 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. For example, we've found that Hubei Kailong Chemical Group has 4 warning signs (1 is a bit concerning!) that deserve your attention before going any further with your analysis.

Today we've zoomed in on a single data point to better understand the nature of Hubei Kailong Chemical Group's profit. But there are plenty of other ways to inform your opinion of a company. 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.