Understanding undistributed earnings per share

Posted by GRY on November 11, 2018

Undistributed earnings per share, as many people know, are related to dividends and stock offerings. Most people are based on the high transfer standards provided on the Internet, for example, each capital accumulation fund is higher than N yuan, each undistributed profit is greater than N yuan, have high transfer. But few really understand what this financial indicator means.

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Mature investors should not just focus on the upside, but understand the implications behind undistributed profits.

Undistributed profit per share = total undistributed profit/total share capital of the current period

The undistributed profit is the remaining profit reserved for the next year. To put it bluntly, the company has accumulated undistributed profits (or losses) over the years. It is an important material base for the company to expand reproduction or distribution in the future. Like net asset per share, it is a stock indicator.

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The undistributed profit has two meanings:

  • the profit reserved for later year distribution;
  • profits that have not yet been earmarked for specific purposes.

The undistributed profit items in the balance sheet reflect the amount of undistributed profit remaining in the balance of the enterprise at the end of the calendar year.

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The analysis of undistributed profit per share mainly starts from the following aspects:

  • I. the more undistributed profit per share, it not only indicates that the company has strong profitability, but also means that the company has strong dividend distribution and stock delivery ability in the future, and the probability is relatively large.

  • II. in general, if the undistributed profit per share of a company exceeds $1, the company has the ability to pay 10 shares per 10 shares or to pay a $1 dividend per share.

  • III. listed companies with large undistributed profits per share are often favored by all kinds of investors because of their strong profitability and dividends ability and high investment return.

  • IV. the stocks of listed companies with large undistributed profits per share are easy to be hyped by some main force, especially the long-term main force, in the secondary market. The main capital can cooperate with the listed company to a certain extent, or reduce the stock price that has been bid high, or earn the large proportion of cash dividends of the listed company, so as to achieve the purpose of reducing the hype cost.

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So, the higher the undistributed profit, the better? In fact, the undistributed profit per share should be a modest value, not the higher the better. As we all know, undistributed profits accumulated over a long period of time without distribution will certainly depreciate. If the “undistributed earnings per share” of a public company is high, but it rarely gives cash dividends to shareholders, or the dividend level is low, then the company is the standard miser!

It is problematic, for example, to imagine a public company with an “undistributed profit per share” of more than $5 a share year after year, which neither expands reproduction nor underwrites shareholder dividends for years.

What’s the problem?

Note that the problem is that the undistributed profits are high, but they don’t pay dividends for several years. If a company every year, share out bonus, the problem that divides how much only.

In the next article, I will analyze why some listed companies are very profitable but do not pay dividends.

Thank you for reading.

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