Does LifeTech Scientific's (HKG:1302) Statutory Profit Adequately Reflect Its Underlying Profit?

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. 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. This article will consider whether LifeTech Scientific's (HKG:1302) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months LifeTech Scientific made a profit of CN¥135.8m on revenue of CN¥633.3m. The chart below shows how it has grown revenue over the last three years, but that profit has declined.

Check out our latest analysis for LifeTech Scientific

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. In this article we will consider how LifeTech Scientific's decision to issue new shares in the company has impacted returns to shareholders. 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.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. LifeTech Scientific expanded the number of shares on issue by 7.1% over the last year. 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 LifeTech Scientific's historical EPS growth by clicking on this link.

A Look At The Impact Of LifeTech Scientific's Dilution on Its Earnings Per Share (EPS).

LifeTech Scientific's net profit dropped by 24% per year over the last three years. Even looking at the last year, profit was still down 7.0%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 2.5% in the same period. 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 LifeTech Scientific'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 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.

Our Take On LifeTech Scientific's Profit Performance

LifeTech Scientific issued shares during the year, and that means its EPS performance lags its net income growth. Therefore, it seems possible to us that LifeTech Scientific's true underlying earnings power is actually less than its statutory profit. Sadly, its EPS was down over the last twelve months. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. 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, we've discovered 2 warning signs that you should run your eye over to get a better picture of LifeTech Scientific.

Today we've zoomed in on a single data point to better understand the nature of LifeTech Scientific'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. 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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