We Believe That Innovative Pharmaceutical Biotech's (HKG:399) Weak Earnings Are A Good Indicator Of Underlying Profitability

After announcing weak earnings, Innovative Pharmaceutical Biotech Limited's (HKG:399) stock was strong. Despite the market responding positively, we think that there are several concerning factors that investors should be aware of.

Check out our latest analysis for Innovative Pharmaceutical Biotech

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Innovative Pharmaceutical Biotech issued 16% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. 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)

Unfortunately, we don't have any visibility into its profits three years back, because we lack the data. And even focusing only on the last twelve months, we see profit is down 82%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 84% in the same period. So you can see that the dilution has had a bit of an impact on shareholders.

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$224m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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. Innovative Pharmaceutical Biotech had a rather significant contribution from unusual items relative to its profit to September 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

To sum it all up, Innovative Pharmaceutical Biotech got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. On top of that, the dilution means that its earnings per share performance is worse than its profit performance. For the reasons mentioned above, we think that a perfunctory glance at Innovative Pharmaceutical Biotech's statutory profits might make it look better than it really is on an underlying level. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Every company has risks, and we've spotted 6 warning signs for Innovative Pharmaceutical Biotech (of which 2 are a bit concerning!) you should know about.

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. 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.