Some May Be Optimistic About Hang Lung Properties' (HKG:101) Earnings

The most recent earnings report from Hang Lung Properties Limited (HKG:101) was disappointing for shareholders. While the headline numbers were soft, we believe that investors might be missing some encouraging factors.

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One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Hang Lung Properties issued 6.3% more new shares 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. You can see a chart of Hang Lung Properties' EPS by clicking here.

A Look At The Impact Of Hang Lung Properties' Dilution On Its Earnings Per Share (EPS)

Hang Lung Properties' net profit dropped by 44% per year over the last three years. And even focusing only on the last twelve months, we see profit is down 46%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 47% in the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, if Hang Lung Properties' earnings per share can increase, then the share price should too. 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.

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.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that Hang Lung Properties' profit suffered from unusual items, which reduced profit by HK$920m in the last twelve months. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Hang Lung Properties to produce a higher profit next year, all else being equal.

Our Take On Hang Lung Properties' Profit Performance

To sum it all up, Hang Lung Properties took a hit from unusual items which pushed its profit down; without that, it would have made more money. But unfortunately the dilution means that shareholders now own a smaller proportion of the company (assuming they maintained the same number of shares). That will weigh on earnings per share, even if it is not reflected in net income. Based on these factors, it's hard to tell if Hang Lung Properties' profits are a reasonable reflection of its underlying profitability. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Every company has risks, and we've spotted 2 warning signs for Hang Lung Properties you should know about.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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 with high insider ownership.

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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.