Are XiDeLang Holdings's (KLSE:XDL) Statutory Earnings A Good Reflection Of Its Earnings Potential?

Broadly speaking, profitable businesses are less risky than unprofitable ones. 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. Today we'll focus on whether this year's statutory profits are a good guide to understanding XiDeLang Holdings (KLSE:XDL).

While XiDeLang Holdings was able to generate revenue of CN¥417.7m in the last twelve months, we think its profit result of CN¥23.1m was more important. Even though its revenue is down over the last three years, its profit has actually increased, as you can see, below.

See our latest analysis for XiDeLang 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'll look at how XiDeLang Holdings is impacting shareholders by issuing new shares. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of XiDeLang Holdings.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, XiDeLang Holdings issued 17% more new shares over the last year. As a result, its net income is now split between 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 XiDeLang Holdings' EPS by clicking here.

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

XiDeLang Holdings has improved its profit over the last three years, with an annualized gain of 91% in that time. In comparison, earnings per share only gained 43% over the same period. Net profit actually dropped by 5.9% in the last year. But the EPS result was even worth, with the company recording a decline of 7.6%. 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, if XiDeLang 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.

Our Take On XiDeLang Holdings' Profit Performance

XiDeLang Holdings issued shares during the year, and that means its EPS performance lags its net income growth. Therefore, it seems possible to us that XiDeLang Holdings' true underlying earnings power is actually less than its statutory profit. Nonetheless, it's still worth noting that its earnings per share have grown at 43% 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Case in point: We've spotted 3 warning signs for XiDeLang Holdings you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of XiDeLang Holdings' profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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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