Why Bichamp Cutting Technology (Hunan)'s (SZSE:002843) Shaky Earnings Are Just The Beginning Of Its Problems

Despite Bichamp Cutting Technology (Hunan) Co., Ltd.'s (SZSE:002843) recent earnings report having lackluster headline numbers, the market responded positively. Sometimes, shareholders are willing to ignore soft numbers with the hope that they will improve, but our analysis suggests this is unlikely for Bichamp Cutting Technology (Hunan).

View our latest analysis for Bichamp Cutting Technology (Hunan)

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Bichamp Cutting Technology (Hunan) increased the number of shares on issue by 19% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. 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. Check out Bichamp Cutting Technology (Hunan)'s historical EPS growth by clicking on this link.

How Is Dilution Impacting Bichamp Cutting Technology (Hunan)'s Earnings Per Share (EPS)?

As you can see above, Bichamp Cutting Technology (Hunan) has been growing its net income over the last few years, with an annualized gain of 179% over three years. But EPS was only up 146% per year, in the exact same period. Net profit actually dropped by 19% in the last year. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 26%. And so, you can see quite clearly that dilution is influencing shareholder earnings.

If Bichamp Cutting Technology (Hunan)'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.

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 Bichamp Cutting Technology (Hunan)'s net profit by CN¥12m 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. Which is hardly surprising, given the name. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Bichamp Cutting Technology (Hunan)'s Profit Performance

To sum it all up, Bichamp Cutting Technology (Hunan) 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. Considering all this we'd argue Bichamp Cutting Technology (Hunan)'s profits probably give an overly generous impression of its sustainable level of profitability. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example, we've discovered 4 warning signs that you should run your eye over to get a better picture of Bichamp Cutting Technology (Hunan).

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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.