Xuchang Yuandong Drive ShaftLtd's (SZSE:002406) Earnings Aren't As Good As They Appear

Even though Xuchang Yuandong Drive Shaft Co.Ltd (SZSE:002406) posted strong earnings recently, the stock hasn't reacted in a large way. We decided to have a deeper look, and we believe that investors might be worried about several concerning factors that we found.

Check out our latest analysis for Xuchang Yuandong Drive ShaftLtd

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Xuchang Yuandong Drive ShaftLtd expanded the number of shares on issue by 17% over the last year. That means its earnings are split among a greater number of shares. 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 Xuchang Yuandong Drive ShaftLtd's EPS by clicking here.

How Is Dilution Impacting Xuchang Yuandong Drive ShaftLtd's Earnings Per Share (EPS)?

Xuchang Yuandong Drive ShaftLtd's net profit dropped by 71% per year over the last three years. On the bright side, in the last twelve months it grew profit by 29%. On the other hand, earnings per share are only up 16% over the same period. 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 it will certainly be a positive for shareholders if Xuchang Yuandong Drive ShaftLtd can grow EPS persistently. 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 Xuchang Yuandong Drive ShaftLtd.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that Xuchang Yuandong Drive ShaftLtd's profit was boosted by unusual items worth CN¥27m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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. We can see that Xuchang Yuandong Drive ShaftLtd's positive unusual items were quite significant relative to its profit in the year to December 2023. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Xuchang Yuandong Drive ShaftLtd's Profit Performance

To sum it all up, Xuchang Yuandong Drive ShaftLtd 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. Considering all this we'd argue Xuchang Yuandong Drive ShaftLtd's profits probably give an overly generous impression of its sustainable level of profitability. So while earnings quality is important, it's equally important to consider the risks facing Xuchang Yuandong Drive ShaftLtd at this point in time. For example, we've found that Xuchang Yuandong Drive ShaftLtd has 4 warning signs (1 can't be ignored!) that deserve your attention before going any further with your analysis.

Our examination of Xuchang Yuandong Drive ShaftLtd 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. 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.