Despite announcing strong earnings, Vongroup Limited's (HKG:318) stock was sluggish. We think that the market might be paying attention to some underlying factors that they find to be concerning.
See our latest analysis for Vongroup
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Vongroup expanded the number of shares on issue by 9.4% over the last year. That means its earnings are split among 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. Check out Vongroup's historical EPS growth by clicking on this link.
A Look At The Impact Of Vongroup's Dilution On Its Earnings Per Share (EPS)
As you can see above, Vongroup has been growing its net income over the last few years, with an annualized gain of 4.4% over three years. In contrast, earnings per share were actually down by 22% per year, in the exact same period. And at a glance the 56% gain in profit over the last year impresses. On the other hand, earnings per share are only up 41% in that time. 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 Vongroup shareholders will want to see that EPS figure continue to increase. 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.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Vongroup.
How Do Unusual Items Influence Profit?
Alongside that dilution, it's also important to note that Vongroup's profit was boosted by unusual items worth HK$3.2m in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).
Our Take On Vongroup's Profit Performance
To sum it all up, Vongroup got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. On top of that, the dilution means that its earnings per share performance is worse than its profit performance. Considering all this we'd argue Vongroup's profits probably give an overly generous impression of its sustainable level of profitability. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For instance, we've identified 3 warning signs for Vongroup (2 can't be ignored) you should be familiar with.
Our examination of Vongroup has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks with significant insider holdings to be useful.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.