Foshan Electrical and LightingLtd's (SZSE:000541) Earnings Aren't As Good As They Appear

We didn't see Foshan Electrical and Lighting Co.,Ltd's (SZSE:000541) stock surge when it reported robust earnings recently. We looked deeper into the numbers and found that shareholders might be concerned with some underlying weaknesses.

View our latest analysis for Foshan Electrical and LightingLtd

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Foshan Electrical and LightingLtd expanded the number of shares on issue by 14% over the last year. As a result, its net income is now split between 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. You can see a chart of Foshan Electrical and LightingLtd's EPS by clicking here.

How Is Dilution Impacting Foshan Electrical and LightingLtd's Earnings Per Share (EPS)?

You can see above that Foshan Electrical and LightingLtd's profit is about the same as it was three years back. Meanwhile EPS has dropped 13% per year over the same time frame. The profit growth of 24% in the last twelve months certainly seems very impressive. On the other hand, earnings per share are only up 11% in the same time frame. 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 it will certainly be a positive for shareholders if Foshan Electrical and LightingLtd can grow EPS persistently. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. 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?

Finally, we should also consider the fact that unusual items boosted Foshan Electrical and LightingLtd's net profit by CN¥122m 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. Which is hardly surprising, given the name. Foshan Electrical and LightingLtd had a rather significant contribution from unusual items relative to its profit 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 Foshan Electrical and LightingLtd's Profit Performance

In its last report Foshan Electrical and LightingLtd 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. For the reasons mentioned above, we think that a perfunctory glance at Foshan Electrical and LightingLtd's statutory profits might make it look better than it really is on an underlying level. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. While conducting our analysis, we found that Foshan Electrical and LightingLtd has 3 warning signs and it would be unwise to ignore these.

Our examination of Foshan Electrical and LightingLtd 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 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. 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.