The market for Sanlux Co.,Ltd's (SZSE:002224) shares didn't move much after it posted weak earnings recently. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

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, SanluxLtd issued 27% more new shares 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 SanluxLtd's historical EPS growth by clicking on this link.

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

Unfortunately, SanluxLtd's profit is down 72% per year over three years. Even looking at the last year, profit was still down 31%. Sadly, earnings per share fell further, down a full 35% in that time. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

In the long term, if SanluxLtd's earnings per share can increase, then the share price should too. 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of SanluxLtd.

The Impact Of Unusual Items On Profit

On top of the dilution, we should also consider the CN¥9.9m impact of unusual items in the last year, which had the effect of suppressing profit. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. In the twelve months to September 2024, SanluxLtd had a big unusual items expense. As a result, we can surmise that the unusual items made its statutory profit significantly weaker than it would otherwise be.

Our Take On SanluxLtd's Profit Performance

To sum it all up, SanluxLtd took a hit from unusual items which pushed its profit down; without that, it would have made more money. 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. After taking into account all these factors, we think that SanluxLtd's statutory results are a decent reflection of its underlying earnings power. So while earnings quality is important, it's equally important to consider the risks facing SanluxLtd at this point in time. Case in point: We've spotted 4 warning signs for SanluxLtd you should be mindful of and 1 of these bad boys is a bit concerning.

Our examination of SanluxLtd has focussed on certain factors that can make its earnings look better than they are. 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. 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.