A lackluster earnings announcement from Zhejiang Weixing Industrial Development Co., Ltd. (SZSE:002003) last week didn't sink the stock price. However, we believe that investors should be aware of some underlying factors which may be of concern.
View our latest analysis for Zhejiang Weixing Industrial Development
In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Zhejiang Weixing Industrial Development increased the number of shares on issue by 13% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. 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 Zhejiang Weixing Industrial Development's historical EPS growth by clicking on this link.
How Is Dilution Impacting Zhejiang Weixing Industrial Development's Earnings Per Share (EPS)?
Zhejiang Weixing Industrial Development has improved its profit over the last three years, with an annualized gain of 24% in that time. Net profit actually dropped by 15% in the last year. But the EPS result was even worse, with the company recording a decline of 13%. And so, you can see quite clearly that dilution is influencing shareholder earnings.
If Zhejiang Weixing Industrial Development'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 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.
The Impact Of Unusual Items On Profit
Alongside that dilution, it's also important to note that Zhejiang Weixing Industrial Development's profit was boosted by unusual items worth CN¥59m 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 that's as you'd expect, given these boosts are described as 'unusual'. If Zhejiang Weixing Industrial Development 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 Zhejiang Weixing Industrial Development's Profit Performance
In its last report Zhejiang Weixing Industrial Development 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 Zhejiang Weixing Industrial Development's profits probably give an overly generous impression of its sustainable level of profitability. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. At Simply Wall St, we found 2 warning signs for Zhejiang Weixing Industrial Development and we think they deserve your attention.
Our examination of Zhejiang Weixing Industrial Development 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 is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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.