Zhejiang Huatie Emergency Equipment Science & TechnologyLtd's (SHSE:603300) Solid Earnings May Rest On Weak Foundations

The market shrugged off Zhejiang Huatie Emergency Equipment Science & Technology Co.,Ltd.'s (SHSE:603300) solid earnings report. We did some digging and believe investors may be worried about some underlying factors in the report.

Check out our latest analysis for Zhejiang Huatie Emergency Equipment Science & TechnologyLtd

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Zhejiang Huatie Emergency Equipment Science & TechnologyLtd expanded the number of shares on issue by 5.2% over the last year. As a result, its net income is now split between a greater number of shares. 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. Check out Zhejiang Huatie Emergency Equipment Science & TechnologyLtd's historical EPS growth by clicking on this link.

A Look At The Impact Of Zhejiang Huatie Emergency Equipment Science & TechnologyLtd's Dilution On Its Earnings Per Share (EPS)

As you can see above, Zhejiang Huatie Emergency Equipment Science & TechnologyLtd has been growing its net income over the last few years, with an annualized gain of 148% over three years. In comparison, earnings per share only gained 83% over the same period. And at a glance the 25% gain in profit over the last year impresses. But in comparison, EPS only increased by 18% over the same period. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So Zhejiang Huatie Emergency Equipment Science & TechnologyLtd 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.

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 Zhejiang Huatie Emergency Equipment Science & TechnologyLtd's net profit by CN¥135m 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 crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And that's as you'd expect, given these boosts are described as 'unusual'. If Zhejiang Huatie Emergency Equipment Science & TechnologyLtd 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 Zhejiang Huatie Emergency Equipment Science & TechnologyLtd's Profit Performance

In its last report Zhejiang Huatie Emergency Equipment Science & TechnologyLtd benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. And furthermore, it went and issued plenty of new shares, ensuring that each shareholder (who did not tip more money in) now owns a smaller proportion of the company. For the reasons mentioned above, we think that a perfunctory glance at Zhejiang Huatie Emergency Equipment Science & TechnologyLtd's statutory profits might make it look better than it really is on an underlying level. So while earnings quality is important, it's equally important to consider the risks facing Zhejiang Huatie Emergency Equipment Science & TechnologyLtd at this point in time. In terms of investment risks, we've identified 2 warning signs with Zhejiang Huatie Emergency Equipment Science & TechnologyLtd, and understanding these bad boys should be part of your investment process.

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. Some people consider a high return on equity to be a good sign of a quality business. 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.