Solid Earnings May Not Tell The Whole Story For Tongguan Gold Group (HKG:340)

The market shrugged off Tongguan Gold Group Limited's (HKG:340) solid earnings report. We think that investors might be worried about some concerning underlying factors.

See our latest analysis for Tongguan Gold Group

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Tongguan Gold Group expanded the number of shares on issue by 20% over the last year. Therefore, each share now receives a smaller portion of profit. 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. Check out Tongguan Gold Group's historical EPS growth by clicking on this link.

How Is Dilution Impacting Tongguan Gold Group's Earnings Per Share (EPS)?

Three years ago, Tongguan Gold Group lost money. On the bright side, in the last twelve months it grew profit by 2.2%. But EPS was far less impressive, dropping 6.2% in that time. This shows how dangerous it is to rely on net income alone, when measuring growth. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, if Tongguan Gold Group's 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 the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Tongguan Gold Group.

Our Take On Tongguan Gold Group's Profit Performance

Each Tongguan Gold Group 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 Tongguan Gold Group's statutory profits are better than its underlying earnings power. In further bad news, its earnings per share decreased in the last year. 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. If you want to do dive deeper into Tongguan Gold Group, you'd also look into what risks it is currently facing. While conducting our analysis, we found that Tongguan Gold Group has 1 warning sign and it would be unwise to ignore this.

Today we've zoomed in on a single data point to better understand the nature of Tongguan Gold Group's profit. But there are plenty of other ways to inform your opinion of a company. 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. 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.