The market shrugged off Tomson Group Limited's (HKG:258) solid earnings report. We did some digging and believe investors may be worried about some underlying factors in the report.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, Tomson Group increased the number of shares on issue by 5.6% over the last twelve months by issuing new shares. 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. Check out Tomson Group's historical EPS growth by clicking on this link.

A Look At The Impact Of Tomson Group's Dilution On Its Earnings Per Share (EPS)

Tomson Group's net profit dropped by 58% per year over the last three years. On the bright side, in the last twelve months it grew profit by 2,337%. On the other hand, earnings per share are only up 2,239% over the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Tomson Group shareholders will want to see that EPS figure continue to increase. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. 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 Tomson Group.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that Tomson Group's profit was boosted by unusual items worth HK$13m in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. If Tomson Group 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 Tomson Group's Profit Performance

In its last report Tomson Group 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. Considering all this we'd argue Tomson Group's profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about Tomson Group as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 3 warning signs we've spotted with Tomson Group (including 2 which make us uncomfortable).

Our examination of Tomson Group 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.