Xin Yuan Enterprises Group (HKG:1748) Is Growing Earnings But Are They A Good Guide?

As a general rule, we think profitable companies are less risky than companies that lose money. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. In this article, we'll look at how useful this year's statutory profit is, when analysing Xin Yuan Enterprises Group (HKG:1748).

We like the fact that Xin Yuan Enterprises Group made a profit of US$7.77m on its revenue of US$54.8m, in the last year. One positive is that it has grown both its profit and its revenue, over the last few years.

See our latest analysis for Xin Yuan Enterprises Group

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 Xin Yuan Enterprises Group'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 Xin Yuan Enterprises Group.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Xin Yuan Enterprises Group expanded the number of shares on issue by 10.0% 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. Check out Xin Yuan Enterprises Group's historical EPS growth by clicking on this link.

How Is Dilution Impacting Xin Yuan Enterprises Group's Earnings Per Share? (EPS)

As you can see above, Xin Yuan Enterprises Group has been growing its net income over the last few years, with an annualized gain of 57% over three years. In contrast, earnings per share were actually down by 99% per year, in the exact same period. And at a glance the 53% gain in profit over the last year impresses. On the other hand, earnings per share are only up 43% 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.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Xin Yuan Enterprises Group can grow EPS persistently. 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.

Our Take On Xin Yuan Enterprises Group's Profit Performance

Each Xin Yuan Enterprises Group 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 Xin Yuan Enterprises Group's statutory profits are better than its underlying earnings power. The good news is that, its earnings per share increased by 43% in the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you want to do dive deeper into Xin Yuan Enterprises Group, you'd also look into what risks it is currently facing. For example, Xin Yuan Enterprises Group has 4 warning signs (and 1 which is a bit concerning) we think you should know about.

This note has only looked at a single factor that sheds light on the nature of Xin Yuan Enterprises Group's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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.

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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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