Jiangsu Hengshun Vinegar-IndustryLtd's (SHSE:600305) Weak Earnings May Only Reveal A Part Of The Whole Picture

The subdued market reaction suggests that Jiangsu Hengshun Vinegar-Industry Co.,Ltd's (SHSE:600305) recent earnings didn't contain any surprises. We think that investors are worried about some weaknesses underlying the earnings.

Check out our latest analysis for Jiangsu Hengshun Vinegar-IndustryLtd

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Jiangsu Hengshun Vinegar-IndustryLtd expanded the number of shares on issue by 11% 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 Jiangsu Hengshun Vinegar-IndustryLtd's EPS by clicking here.

How Is Dilution Impacting Jiangsu Hengshun Vinegar-IndustryLtd's Earnings Per Share (EPS)?

Jiangsu Hengshun Vinegar-IndustryLtd's net profit dropped by 78% per year over the last three years. And even focusing only on the last twelve months, we see profit is down 48%. Sadly, earnings per share fell further, down a full 53% in that time. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, if Jiangsu Hengshun Vinegar-IndustryLtd's earnings per share can increase, then the share price should too. 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.

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?

Alongside that dilution, it's also important to note that Jiangsu Hengshun Vinegar-IndustryLtd's profit suffered from unusual items, which reduced profit by CN¥12m in the last twelve months. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Jiangsu Hengshun Vinegar-IndustryLtd to produce a higher profit next year, all else being equal.

Our Take On Jiangsu Hengshun Vinegar-IndustryLtd's Profit Performance

Jiangsu Hengshun Vinegar-IndustryLtd suffered from unusual items which depressed its profit in its last report; if that is not repeated then profit should be higher, all else being equal. But unfortunately the dilution means that shareholders now own a smaller proportion of the company (assuming they maintained the same number of shares). That will weigh on earnings per share, even if it is not reflected in net income. Given the contrasting considerations, we don't have a strong view as to whether Jiangsu Hengshun Vinegar-IndustryLtd's profits are an apt reflection of its underlying potential for profit. So while earnings quality is important, it's equally important to consider the risks facing Jiangsu Hengshun Vinegar-IndustryLtd at this point in time. For example, Jiangsu Hengshun Vinegar-IndustryLtd has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

Our examination of Jiangsu Hengshun Vinegar-IndustryLtd has focussed on certain factors that can make its earnings look better than they are. 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. 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.