We Think That There Are Issues Underlying Wuxi Zhenhua Auto PartsLtd's (SHSE:605319) Earnings

Despite posting some strong earnings, the market for Wuxi Zhenhua Auto Parts Co.,Ltd.'s (SHSE:605319) stock hasn't moved much. Our analysis suggests that shareholders have noticed something concerning in the numbers.

View our latest analysis for Wuxi Zhenhua Auto PartsLtd

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Wuxi Zhenhua Auto PartsLtd expanded the number of shares on issue by 5.5% 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 Wuxi Zhenhua Auto PartsLtd's historical EPS growth by clicking on this link.

How Is Dilution Impacting Wuxi Zhenhua Auto PartsLtd's Earnings Per Share (EPS)?

Wuxi Zhenhua Auto PartsLtd has improved its profit over the last three years, with an annualized gain of 163% in that time. In comparison, earnings per share only gained 58% over the same period. And at a glance the 71% gain in profit over the last year impresses. On the other hand, earnings per share are only up 71% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Wuxi Zhenhua Auto PartsLtd 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.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Wuxi Zhenhua Auto PartsLtd's Profit Performance

Each Wuxi Zhenhua Auto PartsLtd share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Therefore, it seems possible to us that Wuxi Zhenhua Auto PartsLtd's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 58% per annum growth in EPS for the last three. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. You'd be interested to know, that we found 2 warning signs for Wuxi Zhenhua Auto PartsLtd and you'll want to know about these bad boys.

Today we've zoomed in on a single data point to better understand the nature of Wuxi Zhenhua Auto PartsLtd's profit. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.