Is There More To The Story Than Kimou Environmental Holding's (HKG:6805) Earnings Growth?

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether Kimou Environmental Holding's (HKG:6805) statutory profits are a good guide to its underlying earnings.

We like the fact that Kimou Environmental Holding made a profit of CN¥93.7m on its revenue of CN¥676.6m, in the last year. Happily, it has grown both its profit and revenue over the last three years, as you can see in the chart below.

Check out our latest analysis for Kimou Environmental Holding

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. Therefore, today we will consider the nature of Kimou Environmental Holding's statutory earnings with reference to its dilution of shareholders and the impact of unusual items. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Kimou Environmental Holding.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, Kimou Environmental Holding increased the number of shares on issue by 50% over the last twelve months by issuing new shares. 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 Kimou Environmental Holding's historical EPS growth by clicking on this link.

A Look At The Impact Of Kimou Environmental Holding's Dilution on Its Earnings Per Share (EPS).

As you can see above, Kimou Environmental Holding has been growing its net income over the last few years, with an annualized gain of 413% over three years. In comparison, earnings per share only gained over the same period. And the 119% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 66% in that time. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

In the long term, earnings per share growth should beget share price growth. So Kimou Environmental Holding shareholders will want to see that EPS figure continue to increase. 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.

How Do Unusual Items Influence Profit?

On top of the dilution, we should also consider the CN¥18m 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, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Kimou Environmental Holding to produce a higher profit next year, all else being equal.

Our Take On Kimou Environmental Holding's Profit Performance

Kimou Environmental Holding 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. Having considered these factors, we don't think Kimou Environmental Holding's statutory profits give an overly harsh view of the business. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example, Kimou Environmental Holding has 3 warning signs (and 1 which can't be ignored) we think you should know about.

Our examination of Kimou Environmental Holding has focussed on certain factors that can make its earnings look better than they are. 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. 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.
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