Anhui Tongfeng Electronics Company Limited (SHSE:600237) just reported some strong earnings, and the market reacted accordingly with a healthy uplift in the share price. However, we think that shareholders may be missing some concerning details in the numbers.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Anhui Tongfeng Electronics expanded the number of shares on issue by 12% 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 Anhui Tongfeng Electronics' EPS by clicking here.

A Look At The Impact Of Anhui Tongfeng Electronics' Dilution On Its Earnings Per Share (EPS)

As you can see above, Anhui Tongfeng Electronics has been growing its net income over the last few years, with an annualized gain of 997% over three years. In comparison, earnings per share only gained 971% over the same period. And over the last 12 months, the company grew its profit by 17%. But in comparison, EPS only increased by 15% over the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Anhui Tongfeng Electronics can grow EPS persistently. 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.

Our Take On Anhui Tongfeng Electronics' Profit Performance

Anhui Tongfeng Electronics shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Therefore, it seems possible to us that Anhui Tongfeng Electronics' true underlying earnings power is actually less than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. At Simply Wall St, we found 1 warning sign for Anhui Tongfeng Electronics and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of Anhui Tongfeng Electronics' 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. 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.