Investors Shouldn't Be Too Comfortable With Xin Hwa Holdings Berhad's (KLSE:XINHWA) Robust Earnings

Xin Hwa Holdings Berhad (KLSE:XINHWA) announced strong profits, but the stock was stagnant. Our analysis suggests that shareholders have noticed something concerning in the numbers.

Check out our latest analysis for Xin Hwa Holdings Berhad

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, Xin Hwa Holdings Berhad issued 7.5% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. 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. You can see a chart of Xin Hwa Holdings Berhad's EPS by clicking here.

How Is Dilution Impacting Xin Hwa Holdings Berhad's Earnings Per Share? (EPS)

Xin Hwa Holdings Berhad has improved its profit over the last three years, with an annualized gain of 178% in that time. But EPS was only up 153% per year, in the exact same period. And at a glance the 54% gain in profit over the last year impresses. On the other hand, earnings per share are only up 42% in that time. 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 Hwa Holdings 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 the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Xin Hwa Holdings Berhad.

Our Take On Xin Hwa Holdings Berhad's Profit Performance

Xin Hwa Holdings 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 Xin Hwa Holdings Berhad's statutory profits are better than its underlying earnings power. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For instance, we've identified 3 warning signs for Xin Hwa Holdings Berhad (1 makes us a bit uncomfortable) you should be familiar with.

Today we've zoomed in on a single data point to better understand the nature of Xin Hwa Holdings 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.