Great Tree Pharmacy's (GTSM:6469) Earnings Are Growing But Is There More To The Story?

As a general rule, we think profitable companies are less risky than companies that lose money. 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 Great Tree Pharmacy (GTSM:6469).

While Great Tree Pharmacy was able to generate revenue of NT$8.08b in the last twelve months, we think its profit result of NT$171.2m was more important. One positive is that it has grown both its profit and its revenue, over the last few years.

View our latest analysis for Great Tree Pharmacy

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 Great Tree Pharmacy'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 Great Tree Pharmacy.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Great Tree Pharmacy expanded the number of shares on issue by 5.9% over the last year. As a result, its net income is now split between 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. You can see a chart of Great Tree Pharmacy's EPS by clicking here.

A Look At The Impact Of Great Tree Pharmacy's Dilution on Its Earnings Per Share (EPS).

As you can see above, Great Tree Pharmacy has been growing its net income over the last few years, with an annualized gain of 78% over three years. But EPS was only up 54% per year, in the exact same period. And at a glance the 27% gain in profit over the last year impresses. On the other hand, earnings per share are only up 21% 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.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if Great Tree Pharmacy 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 Great Tree Pharmacy's Profit Performance

Great Tree Pharmacy shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Therefore, it seems possible to us that Great Tree Pharmacy's 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 54% 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. So while earnings quality is important, it's equally important to consider the risks facing Great Tree Pharmacy at this point in time. Every company has risks, and we've spotted 1 warning sign for Great Tree Pharmacy you should know about.

This note has only looked at a single factor that sheds light on the nature of Great Tree Pharmacy's 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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