Qinchuan Machine Tool & Tool Group Share's (SZSE:000837) Shareholders Have More To Worry About Than Lackluster Earnings

Shareholders didn't appear too concerned by Qinchuan Machine Tool & Tool Group Share Co., Ltd.'s (SZSE:000837) weak earnings. We did some analysis and found some concerning details beneath the statutory profit number.

See our latest analysis for Qinchuan Machine Tool & Tool Group Share

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Qinchuan Machine Tool & Tool Group Share increased the number of shares on issue by 12% over the last twelve months by issuing new shares. As a result, its net income is now split between 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 Qinchuan Machine Tool & Tool Group Share's EPS by clicking here.

How Is Dilution Impacting Qinchuan Machine Tool & Tool Group Share's Earnings Per Share (EPS)?

Qinchuan Machine Tool & Tool Group Share's net profit dropped by 66% per year over the last three years. Even looking at the last year, profit was still down 81%. Sadly, earnings per share fell further, down a full 82% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.

If Qinchuan Machine Tool & Tool Group Share's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Qinchuan Machine Tool & Tool Group Share.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted Qinchuan Machine Tool & Tool Group Share's net profit by CN¥108m over the last year. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. 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. Which is hardly surprising, given the name. We can see that Qinchuan Machine Tool & Tool Group Share'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 Qinchuan Machine Tool & Tool Group Share's Profit Performance

To sum it all up, Qinchuan Machine Tool & Tool Group Share got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. 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 Qinchuan Machine Tool & Tool Group Share'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. You'd be interested to know, that we found 3 warning signs for Qinchuan Machine Tool & Tool Group Share and you'll want to know about them.

Our examination of Qinchuan Machine Tool & Tool Group Share 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. 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.