Despite posting some strong earnings, the market for Changchun Engley Automobile Industry Co.,Ltd.'s (SHSE:601279) stock hasn't moved much. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Changchun Engley Automobile IndustryLtd issued 6.1% more new shares over the last year. 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. You can see a chart of Changchun Engley Automobile IndustryLtd's EPS by clicking here.

A Look At The Impact Of Changchun Engley Automobile IndustryLtd's Dilution On Its Earnings Per Share (EPS)

Unfortunately, Changchun Engley Automobile IndustryLtd's profit is down 45% per year over three years. On the bright side, in the last twelve months it grew profit by 93%. On the other hand, earnings per share are only up 95% over the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if Changchun Engley Automobile IndustryLtd 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 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Changchun Engley Automobile IndustryLtd.

Our Take On Changchun Engley Automobile IndustryLtd's Profit Performance

Each Changchun Engley Automobile IndustryLtd share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Because of this, we think that it may be that Changchun Engley Automobile IndustryLtd's statutory profits are better than its underlying earnings power. But the happy news is that, while acknowledging we have to look beyond the statutory numbers, those numbers are still improving, with EPS growing at a very high rate over the last year. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. When we did our research, we found 2 warning signs for Changchun Engley Automobile IndustryLtd (1 makes us a bit uncomfortable!) that we believe deserve your full attention.

This note has only looked at a single factor that sheds light on the nature of Changchun Engley Automobile IndustryLtd's 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. 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.