Investors weren't pleased with the recent soft earnings report from Zhuhai Huafa Properties Co.,Ltd (SHSE:600325). We did some digging and think there are some comforting factors lying beneath the statutory profit numbers.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, Zhuhai Huafa PropertiesLtd issued 30% more new shares over the last year. As a result, its net income is now split between 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 Zhuhai Huafa PropertiesLtd's historical EPS growth by clicking on this link.

How Is Dilution Impacting Zhuhai Huafa PropertiesLtd's Earnings Per Share (EPS)?

Zhuhai Huafa PropertiesLtd's net profit dropped by 42% per year over the last three years. Even looking at the last year, profit was still down 31%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 35% in the same period. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

If Zhuhai Huafa PropertiesLtd'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.

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

On top of the dilution, we should also consider the CN¥575m impact of unusual items in the last year, which had the effect of suppressing profit. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. If Zhuhai Huafa PropertiesLtd doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Zhuhai Huafa PropertiesLtd's Profit Performance

Zhuhai Huafa PropertiesLtd suffered from unusual items which depressed its profit in its last report; if that is not repeated then profit should be higher, all else being equal. But unfortunately the dilution means that shareholders now own a smaller proportion of the company (assuming they maintained the same number of shares). That will weigh on earnings per share, even if it is not reflected in net income. Having considered these factors, we don't think Zhuhai Huafa PropertiesLtd's statutory profits give an overly harsh view of the business. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. You'd be interested to know, that we found 4 warning signs for Zhuhai Huafa PropertiesLtd and you'll want to know about them.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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.