China Resources and Environment Co.,Ltd.'s (SHSE:600217) stock rose after it released a robust earnings report. Despite the strong profit numbers, we believe that there are some deeper issues which investors should look into.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. China Resources and EnvironmentLtd expanded the number of shares on issue by 19% 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. Check out China Resources and EnvironmentLtd's historical EPS growth by clicking on this link.

How Is Dilution Impacting China Resources and EnvironmentLtd's Earnings Per Share (EPS)?

China Resources and EnvironmentLtd's net profit dropped by 79% per year over the last three years. On the bright side, in the last twelve months it grew profit by 41%. On the other hand, earnings per share are only up 39% over the same period. And so, you can see quite clearly that dilution is influencing shareholder earnings.

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 China Resources and EnvironmentLtd 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 the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of China Resources and EnvironmentLtd.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that China Resources and EnvironmentLtd's profit was boosted by unusual items worth CN¥99m in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And, after all, that's exactly what the accounting terminology implies. China Resources and EnvironmentLtd 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 China Resources and EnvironmentLtd's Profit Performance

In its last report China Resources and EnvironmentLtd 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 China Resources and EnvironmentLtd's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into China Resources and EnvironmentLtd, you'd also look into what risks it is currently facing. For example, we've found that China Resources and EnvironmentLtd has 5 warning signs (2 are concerning!) that deserve your attention before going any further with your analysis.

Our examination of China Resources and EnvironmentLtd 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. 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.