Shareholders didn't appear too concerned by Shenzhen Changhong Technology Co., Ltd.'s (SZSE:300151) weak earnings. Our analysis suggests that they may be missing some concerning details underlying the profit numbers.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Shenzhen Changhong Technology expanded the number of shares on issue by 6.0% 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 Shenzhen Changhong Technology's historical EPS growth by clicking on this link.

How Is Dilution Impacting Shenzhen Changhong Technology's Earnings Per Share (EPS)?

Unfortunately, Shenzhen Changhong Technology's profit is down 73% per year over three years. And even focusing only on the last twelve months, we see profit is down 67%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 69% in the same period. And so, you can see quite clearly that dilution is influencing shareholder earnings.

If Shenzhen Changhong Technology'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

Finally, we should also consider the fact that unusual items boosted Shenzhen Changhong Technology's net profit by CN¥14m over the last year. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. Which is hardly surprising, given the name. We can see that Shenzhen Changhong Technology's positive unusual items were quite significant relative to its profit in the year to June 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Shenzhen Changhong Technology's Profit Performance

In its last report Shenzhen Changhong Technology benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. And furthermore, it went and issued plenty of new shares, ensuring that each shareholder (who did not tip more money in) now owns a smaller proportion of the company. Considering all this we'd argue Shenzhen Changhong Technology's profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about Shenzhen Changhong Technology as a business, it's important to be aware of any risks it's facing. You'd be interested to know, that we found 3 warning signs for Shenzhen Changhong Technology and you'll want to know about these.

Our examination of Shenzhen Changhong Technology 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 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.