Changchun Engley Automobile IndustryLtd's (SHSE:601279) Performance Is Even Better Than Its Earnings Suggest

The subdued stock price reaction suggests that Changchun Engley Automobile Industry Co.,Ltd.'s (SHSE:601279) strong earnings didn't offer any surprises. We think that investors have missed some encouraging factors underlying the profit figures.

See our latest analysis for Changchun Engley Automobile IndustryLtd

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, Changchun Engley Automobile IndustryLtd issued 6.1% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. Check out Changchun Engley Automobile IndustryLtd's historical EPS growth by clicking on this link.

A Look At The Impact Of Changchun Engley Automobile IndustryLtd's Dilution On Its Earnings Per Share (EPS)

Changchun Engley Automobile IndustryLtd's net profit dropped by 39% per year over the last three years. On the bright side, in the last twelve months it grew profit by 74%. But EPS was less impressive, up only 79% in that time. And so, you can see quite clearly that dilution is influencing shareholder earnings.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if Changchun Engley Automobile IndustryLtd can grow EPS persistently. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. 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 Changchun Engley Automobile IndustryLtd.

The Impact Of Unusual Items On Profit

On top of the dilution, we should also consider the CN¥33m 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. If Changchun Engley Automobile IndustryLtd doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Changchun Engley Automobile IndustryLtd's Profit Performance

To sum it all up, Changchun Engley Automobile IndustryLtd took a hit from unusual items which pushed its profit down; without that, it would have made more money. But on the other hand, the company issued more shares, so without buying more shares each shareholder will end up with a smaller part of the profit. Based on these factors, it's hard to tell if Changchun Engley Automobile IndustryLtd's profits are a reasonable reflection of its underlying profitability. If you want to do dive deeper into Changchun Engley Automobile IndustryLtd, you'd also look into what risks it is currently facing. Our analysis shows 3 warning signs for Changchun Engley Automobile IndustryLtd (1 can't be ignored!) and we strongly recommend you look at these before investing.

Our examination of Changchun Engley Automobile IndustryLtd 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. Some people consider a high return on equity to be a good sign of a quality business. 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.