A lackluster earnings announcement from Zhengzhou Qianweiyangchu Food Co., Ltd. (SZSE:001215) last week didn't sink the stock price. We think that investors are worried about some weaknesses underlying the earnings.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Zhengzhou Qianweiyangchu Food issued 12% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. 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 Zhengzhou Qianweiyangchu Food's EPS by clicking here.

How Is Dilution Impacting Zhengzhou Qianweiyangchu Food's Earnings Per Share (EPS)?

As you can see above, Zhengzhou Qianweiyangchu Food has been growing its net income over the last few years, with an annualized gain of 44% over three years. In contrast, earnings per share were actually down by 3.6% per year, in the exact same period. Net income was down 4.1% over the last twelve months. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 15%. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, if Zhengzhou Qianweiyangchu Food's earnings per share can increase, then the share price should too. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. 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.

How Do Unusual Items Influence Profit?

Finally, we should also consider the fact that unusual items boosted Zhengzhou Qianweiyangchu Food'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 analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. If Zhengzhou Qianweiyangchu Food doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Zhengzhou Qianweiyangchu Food's Profit Performance

To sum it all up, Zhengzhou Qianweiyangchu Food got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. 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. For the reasons mentioned above, we think that a perfunctory glance at Zhengzhou Qianweiyangchu Food's statutory profits might make it look better than it really is on an underlying level. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example, we've discovered 2 warning signs that you should run your eye over to get a better picture of Zhengzhou Qianweiyangchu Food.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 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.