Foshan Electrical and LightingLtd's (SZSE:000541) Performance Raises Some Questions

Even though Foshan Electrical and Lighting Co.,Ltd (SZSE:000541) posted strong earnings recently, the stock hasn't reacted in a large way. We looked deeper into the numbers and found that shareholders might be concerned with some underlying weaknesses.

See 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)?

Unfortunately, Foshan Electrical and LightingLtd's profit is down 8.4% per year over three years. On the bright side, in the last twelve months it grew profit by 26%. But EPS was less impressive, up only 24% 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 it will certainly be a positive for shareholders if Foshan Electrical and LightingLtd 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 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¥102m 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. And, after all, that's exactly what the accounting terminology implies. We can see that Foshan Electrical and LightingLtd's positive unusual items were quite significant relative to its profit in the year to December 2023. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Foshan Electrical and LightingLtd's Profit Performance

To sum it all up, Foshan Electrical and LightingLtd got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. 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. If you'd like to know more about Foshan Electrical and LightingLtd as a business, it's important to be aware of any risks it's facing. For example, we've discovered 3 warning signs that you should run your eye over to get a better picture of Foshan Electrical and LightingLtd.

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. 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 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.