Investors appear disappointed with Innovative Pharmaceutical Biotech Limited's (HKG:399) recent earnings, despite the decent statutory profit number. Our analysis has found some underlying factors which may be cause for concern.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Innovative Pharmaceutical Biotech expanded the number of shares on issue by 18% 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 Innovative Pharmaceutical Biotech's EPS by clicking here.

A Look At The Impact Of Innovative Pharmaceutical Biotech's Dilution On Its Earnings Per Share (EPS)

Three years ago, Innovative Pharmaceutical Biotech lost money. Zooming in to the last year, we still can't talk about growth rates coherently, since it made a loss last year. But mathematics aside, it is always good to see when a formerly unprofitable business come good (though we accept profit would have been higher if dilution had not been required). And so, you can see quite clearly that dilution is influencing shareholder earnings.

If Innovative Pharmaceutical Biotech's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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 Innovative Pharmaceutical Biotech.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that Innovative Pharmaceutical Biotech's profit was boosted by unusual items worth HK$330m 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. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. We can see that Innovative Pharmaceutical Biotech's positive unusual items were quite significant relative to its profit in the year to March 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Innovative Pharmaceutical Biotech's Profit Performance

In its last report Innovative Pharmaceutical Biotech benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. And furthermore, it went and issued plenty of new shares, ensuring that each shareholder (who did not tip more money in) now owns a smaller proportion of the company. Considering all this we'd argue Innovative Pharmaceutical Biotech's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into Innovative Pharmaceutical Biotech, you'd also look into what risks it is currently facing. For instance, we've identified 6 warning signs for Innovative Pharmaceutical Biotech (2 are significant) you should be familiar with.

Our examination of Innovative Pharmaceutical Biotech 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.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com