We Think That There Are Some Issues For Ningbo Deye Technology Group (SHSE:605117) Beyond Its Promising Earnings

Ningbo Deye Technology Group Co., Ltd.'s (SHSE:605117) robust recent earnings didn't do much to move the stock. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

Check out our latest analysis for Ningbo Deye Technology Group

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Ningbo Deye Technology Group increased the number of shares on issue by 7.1% over the last twelve months by issuing new shares. That means its earnings are split among a greater number of shares. 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. You can see a chart of Ningbo Deye Technology Group's EPS by clicking here.

How Is Dilution Impacting Ningbo Deye Technology Group's Earnings Per Share (EPS)?

Ningbo Deye Technology Group has improved its profit over the last three years, with an annualized gain of 389% in that time. But EPS was only up 311% per year, in the exact same period. And in the last year the company managed to bump profit up by 14%. But in comparison, EPS only increased by 13% over the same period. 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 it will certainly be a positive for shareholders if Ningbo Deye Technology Group can grow EPS persistently. 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 Ningbo Deye Technology Group's net profit by CN¥348m over the last year. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. 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 Ningbo Deye Technology Group 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 Ningbo Deye Technology Group's Profit Performance

In its last report Ningbo Deye Technology Group 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 Ningbo Deye Technology Group's profits probably give an overly generous impression of its sustainable level of profitability. 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. For example, we've discovered 2 warning signs that you should run your eye over to get a better picture of Ningbo Deye Technology Group.

Our examination of Ningbo Deye Technology Group 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. 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 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.