A lackluster earnings announcement from China Nuclear Energy Technology Corporation Limited (HKG:611) last week didn't sink the stock price. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

See our latest analysis for China Nuclear Energy Technology

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, China Nuclear Energy Technology increased the number of shares on issue by 41% over the last twelve months by issuing new shares. As a result, its net income is now split between a greater number of shares. 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 China Nuclear Energy Technology's EPS by clicking here.

How Is Dilution Impacting China Nuclear Energy Technology's Earnings Per Share (EPS)?

Unfortunately, China Nuclear Energy Technology's profit is down 18% per year over three years. Even looking at the last year, profit was still down 3.7%. Sadly, earnings per share fell further, down a full 9.1% in that time. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

If China Nuclear Energy Technology's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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 Nuclear Energy Technology.

How Do Unusual Items Influence Profit?

Finally, we should also consider the fact that unusual items boosted China Nuclear Energy Technology's net profit by HK$19m 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 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. Which is hardly surprising, given the name. If China Nuclear Energy Technology doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On China Nuclear Energy Technology's Profit Performance

In its last report China Nuclear Energy Technology 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 Nuclear Energy Technology's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into China Nuclear Energy Technology, you'd also look into what risks it is currently facing. When we did our research, we found 3 warning signs for China Nuclear Energy Technology (2 are a bit unpleasant!) that we believe deserve your full attention.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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 that insiders are buying to be useful.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.