Does Cheuk Nang (Holdings)'s (HKG:131) Statutory Profit Adequately Reflect Its Underlying Profit?

Broadly speaking, profitable businesses are less risky than unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether Cheuk Nang (Holdings)'s (HKG:131) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months Cheuk Nang (Holdings) made a profit of HK$47.7m on revenue of HK$552.9m. At the risk of seeming quaint, we do like to at least examine profit, even when a stock is improving revenue and considered a 'growth stock'. In the last few years both its revenue and its profit have fallen, as you can see in the chart below.

View our latest analysis for Cheuk Nang (Holdings)

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 will consider how Cheuk Nang (Holdings)'s decision to issue new shares in the company has impacted returns to shareholders. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Cheuk Nang (Holdings).

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Cheuk Nang (Holdings) issued 7.4% 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 Cheuk Nang (Holdings)'s EPS by clicking here.

How Is Dilution Impacting Cheuk Nang (Holdings)'s Earnings Per Share? (EPS)

Unfortunately, Cheuk Nang (Holdings)'s profit is down 89% per year over three years. And even focusing only on the last twelve months, we see profit is down 92%. Sadly, earnings per share fell further, down a full 92% in that time. 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.

If Cheuk Nang (Holdings)'s EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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.

Our Take On Cheuk Nang (Holdings)'s Profit Performance

Cheuk Nang (Holdings) issued shares during the year, and that means its EPS performance lags its net income growth. Therefore, it seems possible to us that Cheuk Nang (Holdings)'s true underlying earnings power is actually less than its statutory profit. Sadly, its EPS was down over the last twelve months. 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. For example, we've discovered 3 warning signs that you should run your eye over to get a better picture of Cheuk Nang (Holdings).

This note has only looked at a single factor that sheds light on the nature of Cheuk Nang (Holdings)'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 Cheuk Nang (Holdings) 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@simplywallst.com.