We don’t think Green Economy Development (HKG: 1315) profits should make shareholders too comfortable
Strong earnings numbers didn’t seem to be enough to please Green Economy Development Limited (HKG: 1315) shareholders. We think they might be concerned about some underlying details that our analysis found.
Consult our latest analysis for the development of the green economy
In order to understand the potential for return per share, it is essential to consider the extent to which a company dilutes its shareholders. Green Economy Development has increased the number of issued shares by 25% over the past year. As a result, its net income is now distributed among a larger number of shares. Celebrating the bottom line while ignoring the dilution is like celebrating because you only have one slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. View Green Economy Development’s historic EPS growth by clicking on this link.
How does dilution affect the earnings per share of green economy development? (EPS)
Three years ago, Green Economy Development lost money. And even just focusing on the last twelve months, we don’t have a significant growth rate because it also suffered a loss a year ago. But math aside, it’s always good to see when a previously unprofitable business comes to fruition (although we accept that the profit would have been higher if dilution hadn’t been necessary). We can therefore see that the dilution had a fairly significant impact on the shareholders.
In the long term, if the benefits of Green Economy Development per share may rise, so should the share price. But on the other hand, we’d be a lot less excited to hear that earnings (but not EPS) were improving. For this reason, one could argue that EPS is more important than long-term net profit, assuming the goal is to assess whether a company’s stock price might rise.
To note: we always recommend that investors check the strength of the balance sheet. Click here to access our review of the green economy development record.
The impact of unusual items on profit
Along with this dilution, it’s also important to note that Green Economy Development’s earnings have been boosted by unusual items worth HK $ 24 million over the past twelve months. While it’s always nice to have higher profits, sometimes a large contribution of unusual items dampens our enthusiasm. When we analyzed the numbers of thousands of publicly traded companies, we found that a boost of unusual items in any given year is often not repeated the following year. And, after all, that’s exactly what accounting terminology implies. We can see that the positive unusual items in Green Economy Development were quite large relative to its profit for the year up to September 2021. All things being equal, this would likely have the effect of making statutory profit a poor indicator of underlying profit power.
Our perspective on the performance of the benefits of green economy development
In its latest report Green Economy Development benefited from unusual items that increased its profit, which could make profit appear better than it actually is on a sustainable basis. On top of that, dilution means that its earnings per share performance is worse than its profit performance. For the reasons mentioned above, we believe that a cursory glance at the statutory benefits of Green Economy Development might make it look better than it actually is at an underlying level. If you are interested in learning more about developing the green economy as a business, it is important to be aware of the risks it faces. For example, the development of the green economy has 3 warning signs we think you should be aware.
In this article, we’ve looked at a number of factors that can undermine the usefulness of profit numbers, and we’ve come out of it with caution. But there is always more to be discovered if you are able to focus your mind on the smallest details. For example, many people see a high return on equity as an indication of a favorable business economy, while others like to “follow the money” and look for stocks that insiders are buying. So you might want to see this free a set of companies offering a high return on equity, or that list of stocks that insiders buy.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.