Zhejiang Jinfei Kaida WheelLtd's (SZSE:002863) Earnings Quality Is Low

Zhejiang Jinfei Kaida Wheel Co.,Ltd.'s (SZSE:002863) stock wasn't much affected by its recent lackluster earnings numbers. We did some analysis and found some concerning details beneath the statutory profit number.

See our latest analysis for Zhejiang Jinfei Kaida WheelLtd

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Zhejiang Jinfei Kaida WheelLtd increased the number of shares on issue by 20% over the last twelve months by issuing new shares. 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 Zhejiang Jinfei Kaida WheelLtd's historical EPS growth by clicking on this link.

A Look At The Impact Of Zhejiang Jinfei Kaida WheelLtd's Dilution On Its Earnings Per Share (EPS)

Zhejiang Jinfei Kaida WheelLtd has improved its profit over the last three years, with an annualized gain of 9.1% in that time. But on the other hand, earnings per share actually fell by 9.7% per year. Net income was down 30% over the last twelve months. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 43%. Therefore, the dilution is having a noteworthy influence on shareholder returns.

If Zhejiang Jinfei Kaida WheelLtd'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 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 Zhejiang Jinfei Kaida WheelLtd.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted Zhejiang Jinfei Kaida WheelLtd's net profit by CN¥80m over the last year. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. We can see that Zhejiang Jinfei Kaida WheelLtd's positive unusual items were quite significant relative to its profit in the year to September 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Zhejiang Jinfei Kaida WheelLtd's Profit Performance

To sum it all up, Zhejiang Jinfei Kaida WheelLtd 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 Zhejiang Jinfei Kaida WheelLtd's profits probably give an overly generous impression of its sustainable level of profitability. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example, we've found that Zhejiang Jinfei Kaida WheelLtd has 4 warning signs (1 doesn't sit too well with us!) that deserve your attention before going any further with your analysis.

Our examination of Zhejiang Jinfei Kaida WheelLtd 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 with high insider ownership.

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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.