Jiangxi Synergy Pharmaceutical's (SZSE:300636) Profits Appear To Have Quality Issues

Jiangxi Synergy Pharmaceutical Co., Ltd.'s (SZSE:300636) healthy profit numbers didn't contain any surprises for investors. However the statutory profit number doesn't tell the whole story, and we have found some factors which might be of concern to shareholders.

See our latest analysis for Jiangxi Synergy Pharmaceutical

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, Jiangxi Synergy Pharmaceutical issued 21% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. 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. You can see a chart of Jiangxi Synergy Pharmaceutical's EPS by clicking here.

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

As you can see above, Jiangxi Synergy Pharmaceutical has been growing its net income over the last few years, with an annualized gain of 57% over three years. But EPS was only up 22% per year, in the exact same period. And over the last 12 months, the company grew its profit by 8.9%. But earnings per share are actually down 7.8%, over the last twelve months. And so, you can see quite clearly that dilution is influencing shareholder earnings.

If Jiangxi Synergy 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.

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.

How Do Unusual Items Influence Profit?

On top of the dilution, we should also consider the CN¥23m impact of unusual items in the last year, which had the effect of suppressing profit. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. If Jiangxi Synergy Pharmaceutical doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Jiangxi Synergy Pharmaceutical's Profit Performance

Jiangxi Synergy Pharmaceutical suffered from unusual items which depressed its profit in its last report; if that is not repeated then profit should be higher, all else being equal. But unfortunately the dilution means that shareholders now own a smaller proportion of the company (assuming they maintained the same number of shares). That will weigh on earnings per share, even if it is not reflected in net income. Based on these factors, we think it's very unlikely that Jiangxi Synergy Pharmaceutical's statutory profits make it seem much weaker than it is. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example - Jiangxi Synergy Pharmaceutical has 1 warning sign we think you should be aware of.

Our examination of Jiangxi Synergy Pharmaceutical has focussed on certain factors that can make its earnings look better than they are. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.