The market seemed underwhelmed by the solid earnings posted by Alibaba Health Information Technology Limited (HKG:241) recently. Our analysis suggests that there are some reasons for hope that investors should be aware of.
Check out our latest analysis for Alibaba Health Information Technology
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Alibaba Health Information Technology issued 19% more new shares 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 Alibaba Health Information Technology's EPS by clicking here.
A Look At The Impact Of Alibaba Health Information Technology's Dilution On Its Earnings Per Share (EPS)
Alibaba Health Information Technology was losing money three years ago. On the bright side, in the last twelve months it grew profit by 47%. On the other hand, earnings per share are only up 30% over the same period. So you can see that the dilution has had a bit of an impact on shareholders.
Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Alibaba Health Information Technology 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.
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.
The Impact Of Unusual Items On Profit
Alongside that dilution, it's also important to note that Alibaba Health Information Technology's profit suffered from unusual items, which reduced profit by CN¥396m in the last twelve months. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. If Alibaba Health Information Technology doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.
Our Take On Alibaba Health Information Technology's Profit Performance
To sum it all up, Alibaba Health Information Technology took a hit from unusual items which pushed its profit down; without that, it would have made more money. But on the other hand, the company issued more shares, so without buying more shares each shareholder will end up with a smaller part of the profit. Given the contrasting considerations, we don't have a strong view as to whether Alibaba Health Information Technology's profits are an apt reflection of its underlying potential for profit. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Case in point: We've spotted 3 warning signs for Alibaba Health Information Technology you should be aware of.
Our examination of Alibaba Health Information Technology has focussed on certain factors that can make its earnings look better than they are. 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 with high insider ownership.
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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.