Investors were disappointed with BAIYU Holdings, Inc.'s (NASDAQ:BYU) earnings, despite the strong profit numbers. We think that the market might be paying attention to some underlying factors that they find to be concerning.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. BAIYU Holdings expanded the number of shares on issue by 1,113% over the last year. Therefore, each share now receives a smaller portion of profit. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of BAIYU Holdings' EPS by clicking here.

How Is Dilution Impacting BAIYU Holdings' Earnings Per Share (EPS)?

BAIYU Holdings was losing money three years ago. Zooming in to the last year, we still can't talk about growth rates coherently, since it made a loss last year. What we do know is that while it's great to see a profit over the last twelve months, that profit would have been better, on a per share basis, if the company hadn't needed to issue shares. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

In the long term, if BAIYU Holdings' 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.

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

Our Take On BAIYU Holdings' Profit Performance

BAIYU Holdings issued shares during the year, and that means its EPS performance lags its net income growth. For this reason, we think that BAIYU Holdings' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. On the bright side, the company showed enough improvement to book a profit this year, after losing money last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you want to do dive deeper into BAIYU Holdings, you'd also look into what risks it is currently facing. Case in point: We've spotted 3 warning signs for BAIYU Holdings you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of BAIYU Holdings' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.