Does Kyung Dong Pharmaceutical's (KOSDAQ:011040) Statutory Profit Adequately Reflect Its Underlying Profit?

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. 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 Kyung Dong Pharmaceutical (KOSDAQ:011040).

While Kyung Dong Pharmaceutical was able to generate revenue of ₩175.1b in the last twelve months, we think its profit result of ₩12.9b was more important. As you can see below, its profit has actually declined over the last three years, even though its revenue was flat.

See our latest analysis for Kyung Dong Pharmaceutical

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 Kyung Dong Pharmaceutical'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 Kyung Dong Pharmaceutical.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Kyung Dong Pharmaceutical increased the number of shares on issue by 17% over the last twelve months by issuing new shares. 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 Kyung Dong Pharmaceutical's historical EPS growth by clicking on this link.

How Is Dilution Impacting Kyung Dong Pharmaceutical's Earnings Per Share? (EPS)

Unfortunately, Kyung Dong Pharmaceutical's profit is down 42% per year over three years. On the bright side, in the last twelve months it grew profit by 119%. But EPS was less impressive, up only 119% 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 Kyung Dong Pharmaceutical shareholders will want to see that EPS figure continue to increase. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On Kyung Dong Pharmaceutical's Profit Performance

Kyung Dong Pharmaceutical shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Because of this, we think that it may be that Kyung Dong Pharmaceutical's statutory profits are better than its underlying earnings power. The silver lining is that its EPS growth over the last year has been really wonderful, even if it's not a perfect measure. 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. If you want to do dive deeper into Kyung Dong Pharmaceutical, you'd also look into what risks it is currently facing. To help with this, we've discovered 3 warning signs (1 is potentially serious!) that you ought to be aware of before buying any shares in Kyung Dong Pharmaceutical.

This note has only looked at a single factor that sheds light on the nature of Kyung Dong Pharmaceutical's 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. 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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