Dongfeng Electronic TechnologyLtd's (SHSE:600081) Profits Appear To Have Quality Issues

The market for Dongfeng Electronic Technology Co.,Ltd.'s (SHSE:600081) stock was strong after it released a healthy earnings report last week. Despite this, our analysis suggests that there are some factors weakening the foundations of those good profit numbers.

View our latest analysis for Dongfeng Electronic TechnologyLtd

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Dongfeng Electronic TechnologyLtd expanded the number of shares on issue by 23% over the last year. As a result, its net income is now split between a greater number of shares. 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. Check out Dongfeng Electronic TechnologyLtd's historical EPS growth by clicking on this link.

How Is Dilution Impacting Dongfeng Electronic TechnologyLtd's Earnings Per Share (EPS)?

As you can see above, Dongfeng Electronic TechnologyLtd has been growing its net income over the last few years, with an annualized gain of 8.2% over three years. But on the other hand, earnings per share actually fell by 33% per year. And the 23% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 15% in that time. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, earnings per share growth should beget share price growth. So Dongfeng Electronic TechnologyLtd shareholders will want to see that EPS figure continue to increase. 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 Dongfeng Electronic TechnologyLtd.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that Dongfeng Electronic TechnologyLtd's profit was boosted by unusual items worth CN¥22m in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Dongfeng Electronic TechnologyLtd's Profit Performance

To sum it all up, Dongfeng Electronic TechnologyLtd got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. On top of that, the dilution means that its earnings per share performance is worse than its profit performance. For the reasons mentioned above, we think that a perfunctory glance at Dongfeng Electronic TechnologyLtd's statutory profits might make it look better than it really is on an underlying level. So while earnings quality is important, it's equally important to consider the risks facing Dongfeng Electronic TechnologyLtd at this point in time. You'd be interested to know, that we found 2 warning signs for Dongfeng Electronic TechnologyLtd and you'll want to know about these.

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 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 that insiders are buying 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.