The subdued market reaction suggests that Daqin Railway Co., Ltd.'s (SHSE:601006) recent earnings didn't contain any surprises. However, we believe that investors should be aware of some underlying factors which may be of concern.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Daqin Railway issued 19% more new shares over the last year. As a result, its net income is now split between 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. You can see a chart of Daqin Railway's EPS by clicking here.

A Look At The Impact Of Daqin Railway's Dilution On Its Earnings Per Share (EPS)

Unfortunately, Daqin Railway's profit is down 23% per year over three years. Even looking at the last year, profit was still down 18%. Sadly, earnings per share fell further, down a full 26% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.

If Daqin Railway'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.

Our Take On Daqin Railway's Profit Performance

Over the last year Daqin Railway issued new shares and so, there's a noteworthy divergence between EPS and net income growth. Because of this, we think that it may be that Daqin Railway's statutory profits are better than its underlying earnings power. Sadly, its EPS was down over the last twelve months. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. When we did our research, we found 2 warning signs for Daqin Railway (1 doesn't sit too well with us!) that we believe deserve your full attention.

This note has only looked at a single factor that sheds light on the nature of Daqin Railway'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 with significant insider holdings 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.