Is There More To The Story Than Cystech Electronics' (GTSM:6651) Earnings Growth?

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether Cystech Electronics' (GTSM:6651) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months Cystech Electronics made a profit of NT$103.8m on revenue of NT$1.11b. One positive is that it has grown both its profit and its revenue, over the last few years.

View our latest analysis for Cystech Electronics

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. In this article we will consider how Cystech Electronics' 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 Cystech Electronics.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Cystech Electronics issued 14% 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 Cystech Electronics' EPS by clicking here.

How Is Dilution Impacting Cystech Electronics' Earnings Per Share? (EPS)

Cystech Electronics has improved its profit over the last three years, with an annualized gain of 86% in that time. But EPS was only up 71% per year, in the exact same period. And at a glance the 98% gain in profit over the last year impresses. But in comparison, EPS only increased by 98% 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 Cystech Electronics 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 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 Cystech Electronics' Profit Performance

Cystech Electronics 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 Cystech Electronics' true underlying earnings power is actually less than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example - Cystech Electronics has 2 warning signs we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Cystech Electronics' 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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