Ho Hup Construction Company Berhad's (KLSE:HOHUP) Earnings Are Growing But Is There More To The Story?

Broadly speaking, profitable businesses are less risky than unprofitable ones. 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. Today we'll focus on whether this year's statutory profits are a good guide to understanding Ho Hup Construction Company Berhad (KLSE:HOHUP).

While Ho Hup Construction Company Berhad was able to generate revenue of RM383.0m in the last twelve months, we think its profit result of RM66.4m was more important. 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 Ho Hup Construction Company Berhad

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. In this article we will consider how Ho Hup Construction Company Berhad'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 Ho Hup Construction Company Berhad.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Ho Hup Construction Company Berhad issued 12% more new shares over the last year. That means its earnings are split among a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. Check out Ho Hup Construction Company Berhad's historical EPS growth by clicking on this link.

A Look At The Impact Of Ho Hup Construction Company Berhad's Dilution on Its Earnings Per Share (EPS).

Ho Hup Construction Company Berhad has improved its profit over the last three years, with an annualized gain of 67% in that time. But EPS was only up 50% per year, in the exact same period. And the 92% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 76% 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 Ho Hup Construction Company Berhad 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 Ho Hup Construction Company Berhad's Profit Performance

Ho Hup Construction Company Berhad 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 Ho Hup Construction Company Berhad's statutory profits are better than its underlying earnings power. Nonetheless, it's still worth noting that its earnings per share have grown at 50% over the last three years. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example, Ho Hup Construction Company Berhad has 4 warning signs (and 2 which are significant) we think you should know about.

Today we've zoomed in on a single data point to better understand the nature of Ho Hup Construction Company Berhad's profit. 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 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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