China Resources and EnvironmentLtd's (SHSE:600217) Performance Raises Some Questions

China Resources and Environment Co.,Ltd.'s (SHSE:600217) stock rose after it released a robust earnings report. While the headline numbers were strong, we found some underlying problems once we started looking at what drove earnings.

View our latest analysis for China Resources and EnvironmentLtd

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, China Resources and EnvironmentLtd issued 19% more new shares over the last year. 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 China Resources and EnvironmentLtd's EPS by clicking here.

How Is Dilution Impacting China Resources and EnvironmentLtd's Earnings Per Share (EPS)?

China Resources and EnvironmentLtd's net profit dropped by 79% per year over the last three years. The good news is that profit was up 41% in the last twelve months. On the other hand, earnings per share are only up 39% over the same period. So you can see that the dilution has had a bit of an impact on shareholders.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if China Resources and EnvironmentLtd can grow EPS persistently. 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 China Resources and EnvironmentLtd.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted China Resources and EnvironmentLtd's net profit by CN¥99m 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 China Resources and EnvironmentLtd's positive unusual items were quite significant relative to its profit in the year to September 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 China Resources and EnvironmentLtd's Profit Performance

To sum it all up, China Resources and EnvironmentLtd 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 China Resources and EnvironmentLtd's profits probably give an overly generous impression of its sustainable level of profitability. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Be aware that China Resources and EnvironmentLtd is showing 5 warning signs in our investment analysis and 2 of those can't be ignored...

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 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. 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.