China Resources Power Holdings Company Limited (HKG:836) announced strong profits, but the stock was stagnant. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. China Resources Power Holdings expanded the number of shares on issue by 7.6% over the last year. That means its earnings are split among a greater number of shares. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. You can see a chart of China Resources Power Holdings' EPS by clicking here.
How Is Dilution Impacting China Resources Power Holdings' Earnings Per Share (EPS)?
China Resources Power Holdings has improved its profit over the last three years, with an annualized gain of 573% in that time. And the 31% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 30% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.
Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if China Resources Power Holdings can grow EPS persistently. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. 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.
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.
Our Take On China Resources Power Holdings' Profit Performance
China Resources Power Holdings 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 China Resources Power Holdings' 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. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. 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. For example, we've found that China Resources Power Holdings has 2 warning signs (1 is significant!) that deserve your attention before going any further with your analysis.
Today we've zoomed in on a single data point to better understand the nature of China Resources Power Holdings' profit. 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.