There May Be Underlying Issues With The Quality Of Beijing Jingneng Thermal's (SZSE:002893) Earnings

Investors were disappointed with Beijing Jingneng Thermal Co., Ltd.'s (SZSE:002893) earnings, despite the strong profit numbers. We think that the market might be paying attention to some underlying factors that they find to be concerning.

Check out our latest analysis for Beijing Jingneng Thermal

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Beijing Jingneng Thermal expanded the number of shares on issue by 30% 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 Beijing Jingneng Thermal's EPS by clicking here.

How Is Dilution Impacting Beijing Jingneng Thermal's Earnings Per Share (EPS)?

Beijing Jingneng Thermal has improved its profit over the last three years, with an annualized gain of 200% in that time. But EPS was only up 135% per year, in the exact same period. And the 37% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 8.5% in that time. So you can see that the dilution has had a fairly significant 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 Beijing Jingneng Thermal can grow EPS persistently. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. 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 Beijing Jingneng Thermal.

Our Take On Beijing Jingneng Thermal's Profit Performance

Beijing Jingneng Thermal shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Therefore, it seems possible to us that Beijing Jingneng Thermal's true underlying earnings power is actually less than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. In terms of investment risks, we've identified 2 warning signs with Beijing Jingneng Thermal, and understanding them should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Beijing Jingneng Thermal's profit. 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. 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.