Tong Hsing Electronic Industries's (TPE:6271) 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 Tong Hsing Electronic Industries (TPE:6271).

While Tong Hsing Electronic Industries was able to generate revenue of NT$8.98b in the last twelve months, we think its profit result of NT$1.21b was more important. One positive is that it has grown both its profit and its revenue, over the last few years.

See our latest analysis for Tong Hsing Electronic Industries

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 Tong Hsing Electronic Industries is impacting shareholders by issuing new shares. That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Tong Hsing Electronic Industries expanded the number of shares on issue by 43% 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 Tong Hsing Electronic Industries' EPS by clicking here.

How Is Dilution Impacting Tong Hsing Electronic Industries' Earnings Per Share? (EPS)

As you can see above, Tong Hsing Electronic Industries has been growing its net income over the last few years, with an annualized gain of 23% over three years. In comparison, earnings per share only gained 12% over the same period. And the 53% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 40% in that time. So you can see that the dilution has had a fairly significant impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So Tong Hsing Electronic Industries 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 Tong Hsing Electronic Industries' Profit Performance

As we discussed above, Tong Hsing Electronic Industries' dilution over the last year has a major impact on its per-share earnings. As a result, we think it may well be the case that Tong Hsing Electronic Industries' underlying earnings power is lower than its statutory profit. Nonetheless, it's still worth noting that its earnings per share have grown at 12% over the last three years. 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. If you want to do dive deeper into Tong Hsing Electronic Industries, you'd also look into what risks it is currently facing. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of Tong Hsing Electronic Industries.

Today we've zoomed in on a single data point to better understand the nature of Tong Hsing Electronic Industries' 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.

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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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