Lingbao Gold Group's (HKG:3330) Earnings Are Of Questionable Quality

Lingbao Gold Group Company Ltd.'s (HKG:3330) robust earnings report didn't manage to move the market for its stock. Our analysis suggests that shareholders have noticed something concerning in the numbers.

View our latest analysis for Lingbao Gold Group

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Lingbao Gold Group increased the number of shares on issue by 44% over the last twelve months by issuing new shares. As a result, its net income is now split between 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 Lingbao Gold Group's historical EPS growth by clicking on this link.

A Look At The Impact Of Lingbao Gold Group's Dilution On Its Earnings Per Share (EPS)

Lingbao Gold Group has improved its profit over the last three years, with an annualized gain of 255% in that time. But EPS was only up 212% per year, in the exact same period. And at a glance the 32% gain in profit over the last year impresses. But in comparison, EPS only increased by 16% over the same period. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Lingbao Gold Group shareholders will want to see that EPS figure continue to increase. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. 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 Lingbao Gold Group.

Our Take On Lingbao Gold Group's Profit Performance

As we discussed above, Lingbao Gold Group's dilution over the last year has a major impact on its per-share earnings. For this reason, we think that Lingbao Gold Group's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But the good news is that its EPS growth over the last three years has been very impressive. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. 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 found that Lingbao Gold Group has 3 warning signs (1 is a bit concerning!) that deserve your attention before going any further with your analysis.

This note has only looked at a single factor that sheds light on the nature of Lingbao Gold Group's profit. 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. 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.