We're Not So Sure You Should Rely on Zensun Enterprises' (HKG:185) Statutory Earnings

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. Today we'll focus on whether this year's statutory profits are a good guide to understanding Zensun Enterprises (HKG:185).

It's good to see that over the last twelve months Zensun Enterprises made a profit of CN¥1.22b on revenue of CN¥10.8b. The good news is that the company managed to grow its revenue over the last three years, and also move from loss-making to profitable.

View our latest analysis for Zensun Enterprises

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 Zensun Enterprises' 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 Zensun Enterprises.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Zensun Enterprises expanded the number of shares on issue by 86% over the last year. 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. Check out Zensun Enterprises' historical EPS growth by clicking on this link.

A Look At The Impact Of Zensun Enterprises' Dilution on Its Earnings Per Share (EPS).

Three years ago, Zensun Enterprises lost money. On the bright side, in the last twelve months it grew profit by 2,656%. But EPS was less impressive, up only 1,644% in that time. So you can see that the dilution has had a fairly significant impact on shareholders.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if Zensun Enterprises can grow EPS persistently. 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 Zensun Enterprises' Profit Performance

As we discussed above, Zensun Enterprises' dilution over the last year has a major impact on its per-share earnings. As a result, we think it may well be the case that Zensun Enterprises' underlying earnings power is lower than its statutory profit. But the happy news is that, while acknowledging we have to look beyond the statutory numbers, those numbers are still improving, with EPS growing at a very high rate over the last year. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. To that end, you should learn about the 3 warning signs we've spotted with Zensun Enterprises (including 2 which shouldn't be ignored).

Today we've zoomed in on a single data point to better understand the nature of Zensun Enterprises' 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 that insiders are buying to be useful.

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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.
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