We Wouldn't Rely On CMIC Ocean En-Tech Holding's (HKG:206) Statutory Earnings As A Guide

Broadly speaking, profitable businesses are less risky than unprofitable ones. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. Today we'll focus on whether this year's statutory profits are a good guide to understanding CMIC Ocean En-Tech Holding (HKG:206).

It's good to see that over the last twelve months CMIC Ocean En-Tech Holding made a profit of US$5.03m on revenue of US$69.0m. Even though revenue is down over the last three years, you can see in the chart below that the company has moved from loss-making to profitable.

Check out our latest analysis for CMIC Ocean En-Tech Holding

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. In this article we'll look at how CMIC Ocean En-Tech Holding is impacting shareholders by issuing new shares, as well as how unusual items have affected the income line. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of CMIC Ocean En-Tech Holding.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, CMIC Ocean En-Tech Holding issued 5.7% more new shares over the last year. As a result, its net income is now split between a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of CMIC Ocean En-Tech Holding's EPS by clicking here.

A Look At The Impact Of CMIC Ocean En-Tech Holding's Dilution on Its Earnings Per Share (EPS).

CMIC Ocean En-Tech Holding was losing money three years ago. Zooming in to the last year, we still can't talk about growth rates coherently, since it made a loss last year. But mathematics aside, it is always good to see when a formerly unprofitable business come good (though we accept profit would have been higher if dilution had not been required). So you can see that the dilution has had a bit of an impact on shareholders. Therefore, the dilution is having a noteworthy influence on shareholder returns. And so, you can see quite clearly that dilution is influencing shareholder earnings.

If CMIC Ocean En-Tech Holding's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted CMIC Ocean En-Tech Holding's net profit by US$3.3m over the last year. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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. We can see that CMIC Ocean En-Tech Holding's positive unusual items were quite significant relative to its profit in the year to June 2020. 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 CMIC Ocean En-Tech Holding's Profit Performance

In its last report CMIC Ocean En-Tech Holding 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 CMIC Ocean En-Tech Holding's statutory profits might make it look better than it really is on an underlying level. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For example - CMIC Ocean En-Tech Holding has 3 warning signs we think you should be aware of.

Our examination of CMIC Ocean En-Tech Holding has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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 that insiders are buying.

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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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