Despite announcing strong earnings, Vongroup Limited's (HKG:318) stock was sluggish. We think that the market might be paying attention to some underlying factors that they find to be concerning.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Vongroup expanded the number of shares on issue by 9.4% over the last year. As a result, its net income is now split between 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 Vongroup's EPS by clicking here.

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

Vongroup has improved its profit over the last three years, with an annualized gain of 4.4% in that time. In contrast, earnings per share were actually down by 22% per year, in the exact same period. And at a glance the 56% gain in profit over the last year impresses. On the other hand, earnings per share are only up 41% in that time. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Vongroup 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 Vongroup.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted Vongroup's net profit by HK$3.2m over the last year. 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. Which is hardly surprising, given the name. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Vongroup's Profit Performance

To sum it all up, Vongroup got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. On top of that, the dilution means that its earnings per share performance is worse than its profit performance. For the reasons mentioned above, we think that a perfunctory glance at Vongroup's statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into Vongroup, you'd also look into what risks it is currently facing. To that end, you should learn about the 3 warning signs we've spotted with Vongroup (including 1 which doesn't sit too well with us).

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 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.