Guizhou Chanhen Chemical's (SZSE:002895) Shareholders May Want To Dig Deeper Than Statutory Profit

The market for Guizhou Chanhen Chemical Corporation's (SZSE:002895) stock was strong after it released a healthy earnings report last week. Despite this, our analysis suggests that there are some factors weakening the foundations of those good profit numbers.

See our latest analysis for Guizhou Chanhen Chemical

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Guizhou Chanhen Chemical expanded the number of shares on issue by 8.0% over the last year. That means its earnings are split among a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out Guizhou Chanhen Chemical's historical EPS growth by clicking on this link.

How Is Dilution Impacting Guizhou Chanhen Chemical's Earnings Per Share (EPS)?

As you can see above, Guizhou Chanhen Chemical has been growing its net income over the last few years, with an annualized gain of 437% over three years. But EPS was only up 354% per year, in the exact same period. However, net income was pretty flat over the last year with a miniscule increase. While EPS growth was also pretty flat, but no prizes for guessing that it looked worse than the net income. So you can see that the dilution has had a bit of an impact on shareholders.

If Guizhou Chanhen Chemical's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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.

Our Take On Guizhou Chanhen Chemical's Profit Performance

Guizhou Chanhen Chemical 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 Guizhou Chanhen Chemical'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. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about Guizhou Chanhen Chemical as a business, it's important to be aware of any risks it's facing. For example, we've discovered 2 warning signs that you should run your eye over to get a better picture of Guizhou Chanhen Chemical.

Today we've zoomed in on a single data point to better understand the nature of Guizhou Chanhen Chemical'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.