Formosa Laboratories's (TPE:4746) Earnings Are Growing But Is There More To The Story?

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. 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 Formosa Laboratories (TPE:4746).

It's good to see that over the last twelve months Formosa Laboratories made a profit of NT$459.8m on revenue of NT$2.99b. One positive is that it has grown both its profit and its revenue, over the last few years.

View our latest analysis for Formosa Laboratories

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. In this article we'll look at how Formosa Laboratories 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 Formosa Laboratories.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, Formosa Laboratories increased the number of shares on issue by 9.4% over the last twelve months by issuing new shares. That means its earnings are split among a greater number of shares. 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. Check out Formosa Laboratories' historical EPS growth by clicking on this link.

How Is Dilution Impacting Formosa Laboratories' Earnings Per Share? (EPS)

Formosa Laboratories has improved its profit over the last three years, with an annualized gain of 33% in that time. In comparison, earnings per share only gained 16% over the same period. And at a glance the 147% gain in profit over the last year impresses. But in comparison, EPS only increased by 137% over the same period. 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 Formosa Laboratories shareholders will want to see that EPS figure continue to increase. 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.

Our Take On Formosa Laboratories' Profit Performance

Formosa Laboratories 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 Formosa Laboratories' true underlying earnings power is actually less than its statutory profit. The silver lining is that its EPS growth over the last year has been really wonderful, even if it's not a perfect measure. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Be aware that Formosa Laboratories is showing 3 warning signs in our investment analysis and 2 of those are potentially serious...

This note has only looked at a single factor that sheds light on the nature of Formosa Laboratories' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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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