Wanguo Gold Group's (HKG:3939) Solid Profits Have Weak Fundamentals

Wanguo Gold Group Limited (HKG:3939) announced strong profits, but the stock was stagnant. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

Our free stock report includes 3 warning signs investors should be aware of before investing in Wanguo Gold Group. Read for free now.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, Wanguo Gold Group issued 31% more new shares over the last year. 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. You can see a chart of Wanguo Gold Group's EPS by clicking here.

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

As you can see above, Wanguo Gold Group has been growing its net income over the last few years, with an annualized gain of 197% over three years. In comparison, earnings per share only gained 175% over the same period. And the 72% profit boost in the last year certainly seems impressive at first glance. But in comparison, EPS only increased by 62% over the same period. So you can see that the dilution has had a fairly significant impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Wanguo Gold Group can grow EPS persistently. 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.

Our data indicates that Wanguo Gold Group insiders have been buying shares! Luckily we are in a position to provide you with this free chart of of all insider buying (and selling).

Our Take On Wanguo Gold Group's Profit Performance

Wanguo Gold Group shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Because of this, we think that it may be that Wanguo Gold Group's statutory profits are better than its underlying earnings power. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. To help with this, we've discovered 3 warning signs (1 can't be ignored!) that you ought to be aware of before buying any shares in Wanguo Gold Group.

This note has only looked at a single factor that sheds light on the nature of Wanguo Gold Group'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. 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 with significant insider holdings 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.