A lackluster earnings announcement from Guoguang Electric Company Limited (SZSE:002045) last week didn't sink the stock price. However, we believe that investors should be aware of some underlying factors which may be of concern.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Guoguang Electric issued 22% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. 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. Check out Guoguang Electric's historical EPS growth by clicking on this link.

How Is Dilution Impacting Guoguang Electric's Earnings Per Share (EPS)?

As you can see above, Guoguang Electric has been growing its net income over the last few years, with an annualized gain of 85% over three years. But EPS was only up 59% per year, in the exact same period. Net income was down 8.7% over the last twelve months. But the EPS result was even worse, with the company recording a decline of 24%. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, if Guoguang Electric's earnings per share can increase, then the share price should too. 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.

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

Alongside that dilution, it's also important to note that Guoguang Electric's profit was boosted by unusual items worth CN¥43m 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. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Guoguang Electric's Profit Performance

In its last report Guoguang Electric benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. 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 Guoguang Electric's statutory profits might make it look better than it really is on an underlying level. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. At Simply Wall St, we found 1 warning sign for Guoguang Electric and we think they deserve your attention.

Our examination of Guoguang Electric 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 is always more to discover if you are capable of focussing your mind on minutiae. 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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks with significant insider holdings to be useful.

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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.