Investors were disappointed with Hangzhou Todaytec Digital Co., Ltd's (SZSE:300743) earnings, despite the strong profit numbers. We did some digging and found some worrying underlying problems.
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Hangzhou Todaytec Digital issued 7.5% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. 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 Hangzhou Todaytec Digital's historical EPS growth by clicking on this link.
How Is Dilution Impacting Hangzhou Todaytec Digital's Earnings Per Share (EPS)?
Hangzhou Todaytec Digital has improved its profit over the last three years, with an annualized gain of 301% in that time. But EPS was only up 276% per year, in the exact same period. And at a glance the 83% gain in profit over the last year impresses. But in comparison, EPS only increased by 64% 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 it will certainly be a positive for shareholders if Hangzhou Todaytec Digital 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.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Hangzhou Todaytec Digital.
Our Take On Hangzhou Todaytec Digital's Profit Performance
Hangzhou Todaytec Digital shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Because of this, we think that it may be that Hangzhou Todaytec Digital's statutory profits are better than its underlying earnings power. 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. You'd be interested to know, that we found 2 warning signs for Hangzhou Todaytec Digital and you'll want to know about them.
Today we've zoomed in on a single data point to better understand the nature of Hangzhou Todaytec Digital's 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 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.
