We Believe That Jinling Pharmaceutical's (SZSE:000919) Weak Earnings Are A Good Indicator Of Underlying Profitability

Investors were disappointed with Jinling Pharmaceutical Company Limited's (SZSE:000919) recent earnings. We looked deeper and believe that there is even more to be worried about, beyond the soft profit numbers.

See our latest analysis for Jinling Pharmaceutical

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, Jinling Pharmaceutical increased the number of shares on issue by 23% over the last twelve months by issuing new shares. That means its earnings are split among 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. You can see a chart of Jinling Pharmaceutical's EPS by clicking here.

A Look At The Impact Of Jinling Pharmaceutical's Dilution On Its Earnings Per Share (EPS)

Unfortunately, Jinling Pharmaceutical's profit is down 14% per year over three years. Even looking at the last year, profit was still down 33%. Sadly, earnings per share fell further, down a full 41% in that time. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

If Jinling Pharmaceutical'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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Jinling Pharmaceutical.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that Jinling Pharmaceutical's profit was boosted by unusual items worth CN¥31m in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. 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. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that Jinling Pharmaceutical's positive unusual items were quite significant relative to its profit in the year to September 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Jinling Pharmaceutical's Profit Performance

In its last report Jinling Pharmaceutical 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. For the reasons mentioned above, we think that a perfunctory glance at Jinling Pharmaceutical's statutory profits might make it look better than it really is on an underlying level. So while earnings quality is important, it's equally important to consider the risks facing Jinling Pharmaceutical at this point in time. Every company has risks, and we've spotted 4 warning signs for Jinling Pharmaceutical you should know about.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.