The subdued market reaction suggests that Vongroup Limited's (HKG:318) recent earnings didn't contain any surprises. We think that investors are worried about some weaknesses underlying the earnings.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Vongroup 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 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 Vongroup's EPS by clicking here.

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

Unfortunately, Vongroup's profit is down 36% per year over three years. Even looking at the last year, profit was still down 32%. Sadly, earnings per share fell further, down a full 36% in that time. And so, you can see quite clearly that dilution is influencing shareholder earnings.

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

Our Take On Vongroup's Profit Performance

Vongroup issued shares during the year, and that means its EPS performance lags its net income growth. Because of this, we think that it may be that Vongroup's statutory profits are better than its underlying earnings power. In further bad news, its earnings per share decreased in the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Be aware that Vongroup is showing 4 warning signs in our investment analysis and 2 of those don't sit too well with us...

Today we've zoomed in on a single data point to better understand the nature of Vongroup's profit. 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.

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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.