Is There More To The Story Than Xinyi Solar Holdings's (HKG:968) Earnings Growth?

As a general rule, we think profitable companies are less risky than companies that lose money. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. In this article, we'll look at how useful this year's statutory profit is, when analysing Xinyi Solar Holdings (HKG:968).

We like the fact that Xinyi Solar Holdings made a profit of HK$2.87b on its revenue of HK$9.72b, in the last year. In the chart below, you can see that its profit and revenue have both grown over the last three years.

View our latest analysis for Xinyi Solar Holdings

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. In this article we will consider how Xinyi Solar Holdings' decision to issue new shares in the company has impacted returns to shareholders. 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.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Xinyi Solar Holdings issued 9.0% more new shares over the last year. That means its earnings are split among a greater number of shares. 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 Xinyi Solar Holdings' EPS by clicking here.

How Is Dilution Impacting Xinyi Solar Holdings' Earnings Per Share? (EPS)

As you can see above, Xinyi Solar Holdings has been growing its net income over the last few years, with an annualized gain of 35% over three years. But EPS was only up 14% per year, in the exact same period. And the 79% profit boost in the last year certainly seems impressive at first glance. But in comparison, EPS only increased by 71% 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.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Xinyi Solar Holdings shareholders will want to see that EPS figure continue to increase. 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 Xinyi Solar Holdings' Profit Performance

Each Xinyi Solar Holdings 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 Xinyi Solar Holdings' statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 14% per annum growth in EPS for the last three. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example, we've discovered 3 warning signs that you should run your eye over to get a better picture of Xinyi Solar Holdings.

Today we've zoomed in on a single data point to better understand the nature of Xinyi Solar Holdings' 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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