The recent earnings posted by China Merchants Shekou Industrial Zone Holdings Co., Ltd. (SZSE:001979) were solid, but the stock didn't move as much as we expected. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, China Merchants Shekou Industrial Zone Holdings issued 17% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of China Merchants Shekou Industrial Zone Holdings' EPS by clicking here.

A Look At The Impact Of China Merchants Shekou Industrial Zone Holdings' Dilution On Its Earnings Per Share (EPS)

Unfortunately, China Merchants Shekou Industrial Zone Holdings' profit is down 48% per year over three years. The good news is that profit was up 48% in the last twelve months. On the other hand, earnings per share are only up 59% over the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, earnings per share growth should beget share price growth. So China Merchants Shekou Industrial Zone Holdings 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 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.

Our Take On China Merchants Shekou Industrial Zone Holdings' Profit Performance

China Merchants Shekou Industrial Zone Holdings shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Therefore, it seems possible to us that China Merchants Shekou Industrial Zone Holdings' true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 59% EPS growth in the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example, we've found that China Merchants Shekou Industrial Zone Holdings has 3 warning signs (1 is a bit concerning!) that deserve your attention before going any further with your analysis.

This note has only looked at a single factor that sheds light on the nature of China Merchants Shekou Industrial Zone Holdings' profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.