Shaky Earnings May Not Tell The Whole Story For Shenzhen Changhong Technology (SZSE:300151)

Shenzhen Changhong Technology Co., Ltd. (SZSE:300151) recently posted soft earnings but shareholders didn't react strongly. We did some digging, and we believe that investors are missing some worrying factors underlying the profit figures.

See our latest analysis for Shenzhen Changhong Technology

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Shenzhen Changhong Technology issued 6.0% more new shares over the last year. 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 Shenzhen Changhong Technology's historical EPS growth by clicking on this link.

How Is Dilution Impacting Shenzhen Changhong Technology's Earnings Per Share (EPS)?

Shenzhen Changhong Technology's net profit dropped by 73% per year over the last three years. And even focusing only on the last twelve months, we see profit is down 67%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 69% in the same period. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, if Shenzhen Changhong Technology's earnings per share can increase, then the share price should too. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. 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.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that Shenzhen Changhong Technology's profit was boosted by unusual items worth CN¥14m in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And that's as you'd expect, given these boosts are described as 'unusual'. Shenzhen Changhong Technology had a rather significant contribution from unusual items relative to its profit to June 2024. 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 Shenzhen Changhong Technology's Profit Performance

To sum it all up, Shenzhen Changhong Technology 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 Shenzhen Changhong Technology's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into Shenzhen Changhong Technology, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 3 warning signs for Shenzhen Changhong Technology and you'll want to know about these.

Our examination of Shenzhen Changhong Technology 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.