We Think That There Are Some Issues For CITIC Heavy Industries (SHSE:601608) Beyond Its Promising Earnings

The recent earnings posted by CITIC Heavy Industries Co., Ltd. (SHSE:601608) were solid, but the stock didn't move as much as we expected. However the statutory profit number doesn't tell the whole story, and we have found some factors which might be of concern to shareholders.

See our latest analysis for CITIC Heavy Industries

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. CITIC Heavy Industries expanded the number of shares on issue by 5.5% over the last year. That means its earnings are split among a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. Check out CITIC Heavy Industries' historical EPS growth by clicking on this link.

A Look At The Impact Of CITIC Heavy Industries' Dilution On Its Earnings Per Share (EPS)

As you can see above, CITIC Heavy Industries has been growing its net income over the last few years, with an annualized gain of 75% over three years. And at a glance the 84% gain in profit over the last year impresses. On the other hand, earnings per share are only up 79% 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 CITIC Heavy Industries shareholders will want to see that EPS figure continue to increase. 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 CITIC Heavy Industries.

How Do Unusual Items Influence Profit?

Finally, we should also consider the fact that unusual items boosted CITIC Heavy Industries' net profit by CN¥89m 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. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that CITIC Heavy Industries' positive unusual items were quite significant relative to its profit in the year to September 2024. 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 CITIC Heavy Industries' Profit Performance

In its last report CITIC Heavy Industries benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. 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 CITIC Heavy Industries' 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. Case in point: We've spotted 3 warning signs for CITIC Heavy Industries you should be aware of.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.