Solid Earnings May Not Tell The Whole Story For China Hongguang Holdings (HKG:8646)

The market shrugged off China Hongguang Holdings Limited's (HKG:8646) solid earnings report. We did some digging and believe investors may be worried about some underlying factors in the report.

See our latest analysis for China Hongguang Holdings

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, China Hongguang Holdings issued 15% more new shares over the last year. 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. Check out China Hongguang Holdings' historical EPS growth by clicking on this link.

A Look At The Impact Of China Hongguang Holdings' Dilution On Its Earnings Per Share (EPS)

China Hongguang Holdings has improved its profit over the last three years, with an annualized gain of 247% in that time. In comparison, earnings per share only gained 131% over the same period. And in the last year the company managed to bump profit up by 3.4%. But that's starkly different from the 23% drop in earnings per share. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, if China Hongguang Holdings' earnings per share can increase, then the share price should too. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of China Hongguang Holdings.

Our Take On China Hongguang Holdings' Profit Performance

Each China Hongguang Holdings 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 China Hongguang Holdings' 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. 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. If you'd like to know more about China Hongguang Holdings as a business, it's important to be aware of any risks it's facing. In terms of investment risks, we've identified 2 warning signs with China Hongguang Holdings, and understanding these bad boys should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of China Hongguang Holdings' profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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.