Hengtong Optic-Electric Co., Ltd.'s (SHSE:600487) robust earnings report didn't manage to move the market for its stock. Our analysis suggests that shareholders have noticed something concerning in the numbers.

View our latest analysis for Hengtong Optic-Electric

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Hengtong Optic-Electric expanded the number of shares on issue by 5.3% over the last year. 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 Hengtong Optic-Electric's historical EPS growth by clicking on this link.

How Is Dilution Impacting Hengtong Optic-Electric's Earnings Per Share (EPS)?

As you can see above, Hengtong Optic-Electric has been growing its net income over the last few years, with an annualized gain of 88% over three years. In comparison, earnings per share only gained 48% over the same period. And the 28% profit boost in the last year certainly seems impressive at first glance. But in comparison, EPS only increased by 23% over the same period. 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 Hengtong Optic-Electric shareholders will want to see that EPS figure continue to increase. 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.

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 Hengtong Optic-Electric's Profit Performance

Each Hengtong Optic-Electric share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Therefore, it seems possible to us that Hengtong Optic-Electric's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 48% per annum growth in EPS for the last three. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. While conducting our analysis, we found that Hengtong Optic-Electric has 2 warning signs and it would be unwise to ignore these bad boys.

Today we've zoomed in on a single data point to better understand the nature of Hengtong Optic-Electric's 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. 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.