Infinity Development Holdings' (HKG:640) Shareholders May Want To Dig Deeper Than Statutory Profit
Following the solid earnings report from Infinity Development Holdings Company Limited (HKG:640), the market responded by bidding up the stock price. While the profit numbers were good, our analysis has found some concerning factors that shareholders should be aware of.
To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, Infinity Development Holdings increased the number of shares on issue by 12% over the last twelve months by issuing new shares. As a result, its net income is now split between 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 Infinity Development Holdings' EPS by clicking here.
How Is Dilution Impacting Infinity Development Holdings' Earnings Per Share (EPS)?
Infinity Development Holdings has improved its profit over the last three years, with an annualized gain of 21% in that time. And the 22% profit boost in the last year certainly seems impressive at first glance. But in comparison, EPS only increased by 22% over the same period. 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 Infinity Development Holdings can grow EPS persistently. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. 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 Infinity Development Holdings.
Our Take On Infinity Development Holdings' Profit Performance
Infinity Development Holdings 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 Infinity Development Holdings' statutory profits are better than its underlying earnings power. Nonetheless, it's still worth noting that its earnings per share have grown at 21% over the last three years. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example - Infinity Development Holdings has 1 warning sign we think you should be aware of.
This note has only looked at a single factor that sheds light on the nature of Infinity Development Holdings' profit. But there are plenty of other ways to inform your opinion of a company. 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.