Does Chi Hua Fitness's (GTSM:1593) Statutory Profit Adequately Reflect Its Underlying Profit?

Statistically speaking, it is less risky to invest in profitable companies than in 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 Chi Hua Fitness (GTSM:1593).

We like the fact that Chi Hua Fitness made a profit of NT$124.7m on its revenue of NT$799.3m, in the last year. The chart below shows that revenue has been pretty flat over the last three years, but profit has increased.

View our latest analysis for Chi Hua Fitness

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'll look at how Chi Hua Fitness 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 Chi Hua Fitness.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Chi Hua Fitness issued 6.3% more new shares over the last year. 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. You can see a chart of Chi Hua Fitness' EPS by clicking here.

How Is Dilution Impacting Chi Hua Fitness' Earnings Per Share? (EPS)

Chi Hua Fitness has improved its profit over the last three years, with an annualized gain of 14% in that time. While we did see a very small increase, net profit was basically flat over the last year. While EPS growth was also pretty flat, but no prizes for guessing that it looked worse than the net income. 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 Chi Hua Fitness can grow EPS persistently. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On Chi Hua Fitness' Profit Performance

Chi Hua Fitness 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 Chi Hua Fitness' statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 8.1% per annum growth in EPS for the last three. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. In terms of investment risks, we've identified 3 warning signs with Chi Hua Fitness, and understanding these should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Chi Hua Fitness' 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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