Why Ningbo Heli Technology's (SHSE:603917) Shaky Earnings Are Just The Beginning Of Its Problems

The market shrugged off Ningbo Heli Technology Co., Ltd.'s (SHSE:603917) weak earnings report last week. Our analysis suggests that there are some positive factors lying below the troubling profit numbers which investors are finding comfort in.

See our latest analysis for Ningbo Heli Technology

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Ningbo Heli Technology expanded the number of shares on issue by 30% 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. You can see a chart of Ningbo Heli Technology's EPS by clicking here.

How Is Dilution Impacting Ningbo Heli Technology's Earnings Per Share (EPS)?

Ningbo Heli Technology's net profit dropped by 76% per year over the last three years. And even focusing only on the last twelve months, we see profit is down 69%. Sadly, earnings per share fell further, down a full 71% in that time. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

If Ningbo Heli Technology's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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 Ningbo Heli Technology.

The Impact Of Unusual Items On Profit

On top of the dilution, we should also consider the CN¥9.3m 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. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Ningbo Heli Technology to produce a higher profit next year, all else being equal.

Our Take On Ningbo Heli Technology's Profit Performance

To sum it all up, Ningbo Heli Technology 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 Ningbo Heli Technology's profits are a reasonable reflection of its underlying profitability. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Case in point: We've spotted 5 warning signs for Ningbo Heli Technology you should be mindful of and 2 of them are concerning.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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 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.