Some Investors May Be Willing To Look Past Zhejiang XCC GroupLtd's (SHSE:603667) Soft Earnings

Zhejiang XCC Group Co.,Ltd's (SHSE:603667) stock was strong despite it releasing a soft earnings report last week. We think that investors might be looking at some positive factors beyond the earnings numbers.

View our latest analysis for Zhejiang XCC GroupLtd

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Zhejiang XCC GroupLtd expanded the number of shares on issue by 12% over the last year. That means its earnings are split among 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. You can see a chart of Zhejiang XCC GroupLtd's EPS by clicking here.

How Is Dilution Impacting Zhejiang XCC GroupLtd's Earnings Per Share (EPS)?

As you can see above, Zhejiang XCC GroupLtd has been growing its net income over the last few years, with an annualized gain of 61% over three years. But EPS was only up 37% per year, in the exact same period. Net profit actually dropped by 8.1% in the last year. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 18%. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, if Zhejiang XCC GroupLtd's earnings per share can increase, then the share price should too. 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.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that Zhejiang XCC GroupLtd's profit suffered from unusual items, which reduced profit by CN¥40m in the last twelve months. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Zhejiang XCC GroupLtd to produce a higher profit next year, all else being equal.

Our Take On Zhejiang XCC GroupLtd's Profit Performance

Zhejiang XCC GroupLtd suffered from unusual items which depressed its profit in its last report; if that is not repeated then profit should be higher, all else being equal. But unfortunately the dilution means that shareholders now own a smaller proportion of the company (assuming they maintained the same number of shares). That will weigh on earnings per share, even if it is not reflected in net income. Given the contrasting considerations, we don't have a strong view as to whether Zhejiang XCC GroupLtd's profits are an apt reflection of its underlying potential for profit. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. In terms of investment risks, we've identified 4 warning signs with Zhejiang XCC GroupLtd, and understanding these should be part of your investment process.

Our examination of Zhejiang XCC GroupLtd has focussed on certain factors that can make its earnings look better than they are. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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.