Sichuan Kelun Pharmaceutical's (SZSE:002422) Earnings Are Weaker Than They Seem

Unsurprisingly, Sichuan Kelun Pharmaceutical Co., Ltd.'s (SZSE:002422) stock price was strong on the back of its healthy earnings report. However, we think that shareholders may be missing some concerning details in the numbers.

Check out our latest analysis for Sichuan Kelun Pharmaceutical

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, Sichuan Kelun Pharmaceutical increased the number of shares on issue by 8.9% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. 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 Kelun Pharmaceutical's historical EPS growth by clicking on this link.

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

Sichuan Kelun Pharmaceutical has improved its profit over the last three years, with an annualized gain of 171% in that time. And in the last year the company managed to bump profit up by 20%. On the other hand, earnings per share are only up 13% in that time. And so, you can see quite clearly that dilution is influencing shareholder earnings.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Sichuan Kelun Pharmaceutical shareholders will want to see that EPS figure continue to increase. 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.

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 Kelun Pharmaceutical's Profit Performance

Each Sichuan Kelun Pharmaceutical share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Because of this, we think that it may be that Sichuan Kelun Pharmaceutical's statutory profits are better than its underlying earnings power. But the good news is that its EPS growth over the last three years has been very impressive. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. You'd be interested to know, that we found 2 warning signs for Sichuan Kelun Pharmaceutical and you'll want to know about these bad boys.

This note has only looked at a single factor that sheds light on the nature of Sichuan Kelun Pharmaceutical'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.