Solid Earnings May Not Tell The Whole Story For Zhejiang Huilong New MaterialsLtd (SZSE:301057)

Following the solid earnings report from Zhejiang Huilong New Materials Co.,Ltd. (SZSE:301057), the market responded by bidding up the stock price. While the profit numbers were good, our analysis has found some concerning factors that shareholders should be aware of.

Check out our latest analysis for Zhejiang Huilong New MaterialsLtd

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Zhejiang Huilong New MaterialsLtd issued 6.0% 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 Zhejiang Huilong New MaterialsLtd's EPS by clicking here.

A Look At The Impact Of Zhejiang Huilong New MaterialsLtd's Dilution On Its Earnings Per Share (EPS)

Zhejiang Huilong New MaterialsLtd's net profit dropped by 23% per year over the last three years. On the bright side, in the last twelve months it grew profit by 27%. But EPS was less impressive, up only 21% in that time. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Zhejiang Huilong New MaterialsLtd can grow EPS persistently. 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Zhejiang Huilong New MaterialsLtd.

Our Take On Zhejiang Huilong New MaterialsLtd's Profit Performance

Zhejiang Huilong New MaterialsLtd shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Because of this, we think that it may be that Zhejiang Huilong New MaterialsLtd's statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 21% EPS growth in the last year. 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. If you'd like to know more about Zhejiang Huilong New MaterialsLtd as a business, it's important to be aware of any risks it's facing. Be aware that Zhejiang Huilong New MaterialsLtd is showing 4 warning signs in our investment analysis and 1 of those is potentially serious...

This note has only looked at a single factor that sheds light on the nature of Zhejiang Huilong New MaterialsLtd's profit. 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. 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 that insiders are buying 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.