Changchun Engley Automobile IndustryLtd's (SHSE:601279) Anemic Earnings Might Be Worse Than You Think

Changchun Engley Automobile Industry Co.,Ltd.'s (SHSE:601279) recent weak earnings report didn't cause a big stock movement. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

Check out our latest analysis for Changchun Engley Automobile IndustryLtd

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Changchun Engley Automobile IndustryLtd expanded the number of shares on issue by 6.1% 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 Changchun Engley Automobile IndustryLtd's EPS by clicking here.

How Is Dilution Impacting Changchun Engley Automobile IndustryLtd's Earnings Per Share (EPS)?

Unfortunately, Changchun Engley Automobile IndustryLtd's profit is down 46% per year over three years. And even focusing only on the last twelve months, we see profit is down 38%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 33% in the same period. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, if Changchun Engley Automobile IndustryLtd'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 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 Changchun Engley Automobile IndustryLtd.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that Changchun Engley Automobile IndustryLtd's profit was boosted by unusual items worth CN¥12m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And that's as you'd expect, given these boosts are described as 'unusual'. If Changchun Engley Automobile IndustryLtd 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 Changchun Engley Automobile IndustryLtd's Profit Performance

In its last report Changchun Engley Automobile IndustryLtd benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. 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. Considering all this we'd argue Changchun Engley Automobile IndustryLtd's profits probably give an overly generous impression of its sustainable level of profitability. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. To help with this, we've discovered 3 warning signs (1 doesn't sit too well with us!) that you ought to be aware of before buying any shares in Changchun Engley Automobile IndustryLtd.

Our examination of Changchun Engley Automobile IndustryLtd has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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.