SanluxLtd's (SZSE:002224) Soft Earnings Don't Show The Whole Picture

Soft earnings didn't appear to concern Sanlux Co.,Ltd's (SZSE:002224) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.

See our latest analysis for SanluxLtd

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, SanluxLtd increased the number of shares on issue by 27% 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. Check out SanluxLtd's historical EPS growth by clicking on this link.

A Look At The Impact Of SanluxLtd's Dilution On Its Earnings Per Share (EPS)

SanluxLtd's net profit dropped by 72% per year over the last three years. And even focusing only on the last twelve months, we see profit is down 31%. Sadly, earnings per share fell further, down a full 35% in that time. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

If SanluxLtd'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 the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of SanluxLtd.

The Impact Of Unusual Items On Profit

On top of the dilution, we should also consider the CN¥9.9m impact of unusual items in the last year, which had the effect of suppressing profit. 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. SanluxLtd took a rather significant hit from unusual items in the year to September 2024. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

Our Take On SanluxLtd's Profit Performance

SanluxLtd 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. Considering the aforementioned, we think that SanluxLtd's profits are probably a reasonable reflection of its underlying profitability; although we'd be confident in that conclusion if we saw a cleaner set of results. So while earnings quality is important, it's equally important to consider the risks facing SanluxLtd at this point in time. Every company has risks, and we've spotted 4 warning signs for SanluxLtd (of which 1 makes us a bit uncomfortable!) you should know about.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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. 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 with significant insider holdings 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.