Guan Chao Holdings' (HKG:1872) Shareholders Have More To Worry About Than Only Soft Earnings

Guan Chao Holdings Limited's (HKG:1872) recent weak earnings report didn't cause a big stock movement. However, we believe that investors should be aware of some underlying factors which may be of concern.

See our latest analysis for Guan Chao Holdings

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, Guan Chao Holdings issued 20% more new shares 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 Guan Chao Holdings' historical EPS growth by clicking on this link.

How Is Dilution Impacting Guan Chao Holdings' Earnings Per Share (EPS)?

Guan Chao Holdings' net profit dropped by 75% per year over the last three years. And even focusing only on the last twelve months, we see profit is down 73%. Sadly, earnings per share fell further, down a full 73% in that time. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, if Guan Chao Holdings' earnings per share can increase, then the share price should too. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Guan Chao Holdings.

How Do Unusual Items Influence Profit?

Finally, we should also consider the fact that unusual items boosted Guan Chao Holdings' net profit by S$1.1m over the last year. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Guan Chao Holdings' Profit Performance

To sum it all up, Guan Chao Holdings got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. On top of that, the dilution means that its earnings per share performance is worse than its profit performance. Considering all this we'd argue Guan Chao Holdings' profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about Guan Chao Holdings as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 7 warning signs we've spotted with Guan Chao Holdings (including 2 which make us uncomfortable).

Our examination of Guan Chao Holdings has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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 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.