Why China Aerospace Times Electronics' (SHSE:600879) Shaky Earnings Are Just The Beginning Of Its Problems

Last week's earnings announcement from China Aerospace Times Electronics CO., LTD. (SHSE:600879) was disappointing to investors, with a sluggish profit figure. We did some analysis, and found that there are some reasons to be cautious about the headline numbers.

View our latest analysis for China Aerospace Times Electronics

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, China Aerospace Times Electronics increased the number of shares on issue by 21% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. You can see a chart of China Aerospace Times Electronics' EPS by clicking here.

How Is Dilution Impacting China Aerospace Times Electronics' Earnings Per Share (EPS)?

China Aerospace Times Electronics has improved its profit over the last three years, with an annualized gain of 9.7% in that time. Net income was down 14% over the last twelve months. But the EPS result was even worse, with the company recording a decline of 21%. So you can see that the dilution has had a bit of an impact on shareholders.

If China Aerospace Times Electronics' 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.

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.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted China Aerospace Times Electronics' net profit by CN¥81m over the last year. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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. If China Aerospace Times Electronics doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On China Aerospace Times Electronics' Profit Performance

To sum it all up, China Aerospace Times Electronics 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 China Aerospace Times Electronics' profits probably give an overly generous impression of its sustainable level of profitability. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example - China Aerospace Times Electronics has 2 warning signs we think you should be aware of.

Our examination of China Aerospace Times Electronics 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. 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.