Investors were disappointed with Guizhou Chanhen Chemical Corporation's (SZSE:002895) earnings, despite the strong profit numbers. We think that the market might be paying attention to some underlying factors that they find to be concerning.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, Guizhou Chanhen Chemical issued 7.4% more new shares 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. Check out Guizhou Chanhen Chemical's historical EPS growth by clicking on this link.

A Look At The Impact Of Guizhou Chanhen Chemical's Dilution On Its Earnings Per Share (EPS)

As you can see above, Guizhou Chanhen Chemical has been growing its net income over the last few years, with an annualized gain of 347% over three years. In comparison, earnings per share only gained 303% over the same period. And the 43% profit boost in the last year certainly seems impressive at first glance. But in comparison, EPS only increased by 33% 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 Guizhou Chanhen Chemical 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 Guizhou Chanhen Chemical's Profit Performance

Guizhou Chanhen Chemical 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 Guizhou Chanhen Chemical'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. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. You'd be interested to know, that we found 2 warning signs for Guizhou Chanhen Chemical and you'll want to know about these.

This note has only looked at a single factor that sheds light on the nature of Guizhou Chanhen Chemical's 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.