Should You Rely On Shanghai Fudan-Zhangjiang Bio-Pharmaceutical's (HKG:1349) Earnings Growth?

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether Shanghai Fudan-Zhangjiang Bio-Pharmaceutical's (HKG:1349) statutory profits are a good guide to its underlying earnings.

While Shanghai Fudan-Zhangjiang Bio-Pharmaceutical was able to generate revenue of CN¥900.7m in the last twelve months, we think its profit result of CN¥190.7m was more important. In the chart below, you can see that its profit and revenue have both grown over the last three years.

See our latest analysis for Shanghai Fudan-Zhangjiang Bio-Pharmaceutical

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. In this article we'll look at how Shanghai Fudan-Zhangjiang Bio-Pharmaceutical is impacting shareholders by issuing new shares. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shanghai Fudan-Zhangjiang Bio-Pharmaceutical.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Shanghai Fudan-Zhangjiang Bio-Pharmaceutical increased the number of shares on issue by 13% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. 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 Shanghai Fudan-Zhangjiang Bio-Pharmaceutical's EPS by clicking here.

A Look At The Impact Of Shanghai Fudan-Zhangjiang Bio-Pharmaceutical's Dilution on Its Earnings Per Share (EPS).

As you can see above, Shanghai Fudan-Zhangjiang Bio-Pharmaceutical has been growing its net income over the last few years, with an annualized gain of 76% over three years. And the 25% profit boost in the last year certainly seems impressive at first glance. But in comparison, EPS only increased by 26% over 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.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Shanghai Fudan-Zhangjiang Bio-Pharmaceutical 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 Take On Shanghai Fudan-Zhangjiang Bio-Pharmaceutical's Profit Performance

Each Shanghai Fudan-Zhangjiang Bio-Pharmaceutical 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 Shanghai Fudan-Zhangjiang Bio-Pharmaceutical'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. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. You'd be interested to know, that we found 2 warning signs for Shanghai Fudan-Zhangjiang Bio-Pharmaceutical and you'll want to know about them.

Today we've zoomed in on a single data point to better understand the nature of Shanghai Fudan-Zhangjiang Bio-Pharmaceutical'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. 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.

When trading Shanghai Fudan-Zhangjiang Bio-Pharmaceutical or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.