Impulse (Qingdao) Health Tech Co.,Ltd.'s (SZSE:002899) stock showed strength, with investors undeterred by its weak earnings report. Sometimes, shareholders are willing to ignore soft numbers with the hope that they will improve, but our analysis suggests this is unlikely for Impulse (Qingdao) Health TechLtd.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Impulse (Qingdao) Health TechLtd expanded the number of shares on issue by 22% 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. Check out Impulse (Qingdao) Health TechLtd's historical EPS growth by clicking on this link.

A Look At The Impact Of Impulse (Qingdao) Health TechLtd's Dilution On Its Earnings Per Share (EPS)

As you can see above, Impulse (Qingdao) Health TechLtd has been growing its net income over the last few years, with an annualized gain of 153% over three years. But EPS was only up 136% per year, in the exact same period. Net income was down 5.4% over the last twelve months. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 14%. So you can see that the dilution has had a bit of an impact on shareholders.

If Impulse (Qingdao) Health TechLtd'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 Impulse (Qingdao) Health TechLtd.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that Impulse (Qingdao) Health TechLtd's profit was boosted by unusual items worth CN¥14m 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 Impulse (Qingdao) Health TechLtd 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 Impulse (Qingdao) Health TechLtd's Profit Performance

In its last report Impulse (Qingdao) Health TechLtd 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. For the reasons mentioned above, we think that a perfunctory glance at Impulse (Qingdao) Health TechLtd's statutory profits might make it look better than it really is on an underlying level. So while earnings quality is important, it's equally important to consider the risks facing Impulse (Qingdao) Health TechLtd at this point in time. For example - Impulse (Qingdao) Health TechLtd has 1 warning sign we think you should be aware of.

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 is always more to discover if you are capable of focussing your mind on minutiae. 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.