Shareholders didn't seem to be thrilled with Zhewen Interactive Group Co., Ltd.'s (SHSE:600986) recent earnings report, despite healthy profit numbers. We think that they might be concerned about some underlying details that our analysis found.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Zhewen Interactive Group expanded the number of shares on issue by 13% 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. You can see a chart of Zhewen Interactive Group's EPS by clicking here.

A Look At The Impact Of Zhewen Interactive Group's Dilution On Its Earnings Per Share (EPS)

As you can see above, Zhewen Interactive Group has been growing its net income over the last few years, with an annualized gain of 43% over three years. In comparison, earnings per share only gained 28% over the same period. And at a glance the 114% gain in profit over the last year impresses. But in comparison, EPS only increased by 114% over the same period. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So Zhewen Interactive Group shareholders will want to see that EPS figure continue to increase. 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.

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.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted Zhewen Interactive Group's net profit by CN¥86m over the last year. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. Zhewen Interactive Group had a rather significant contribution from unusual items relative to its profit to March 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Zhewen Interactive Group's Profit Performance

In its last report Zhewen Interactive Group benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. And furthermore, it went and issued plenty of new shares, ensuring that each shareholder (who did not tip more money in) now owns a smaller proportion of the company. Considering all this we'd argue Zhewen Interactive Group's profits probably give an overly generous impression of its sustainable level of profitability. So while earnings quality is important, it's equally important to consider the risks facing Zhewen Interactive Group at this point in time. While conducting our analysis, we found that Zhewen Interactive Group has 2 warning signs and it would be unwise to ignore them.

Our examination of Zhewen Interactive Group 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. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.