Guizhou RedStar DevelopingLtd's (SHSE:600367) Earnings Might Be Weaker Than You Think

Shareholders were pleased with the recent earnings report from Guizhou RedStar Developing Co.,Ltd. (SHSE:600367). Investors should be cautious however, as there some causes of concern deeper in the numbers.

View our latest analysis for Guizhou RedStar DevelopingLtd

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Guizhou RedStar DevelopingLtd issued 16% more new shares over the last year. As a result, its net income is now split between a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out Guizhou RedStar DevelopingLtd's historical EPS growth by clicking on this link.

A Look At The Impact Of Guizhou RedStar DevelopingLtd's Dilution On Its Earnings Per Share (EPS)

Unfortunately, we don't have any visibility into its profits three years back, because we lack the data. Zooming in to the last year, we still can't talk about growth rates coherently, since it made a loss last year. But mathematics aside, it is always good to see when a formerly unprofitable business come good (though we accept profit would have been higher if dilution had not been required). So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, if Guizhou RedStar DevelopingLtd'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 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 Guizhou RedStar DevelopingLtd.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted Guizhou RedStar DevelopingLtd's net profit by CN¥65m 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. 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'. We can see that Guizhou RedStar DevelopingLtd'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 Guizhou RedStar DevelopingLtd's Profit Performance

In its last report Guizhou RedStar DevelopingLtd benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. On top of that, the dilution means that its earnings per share performance is worse than its profit performance. For the reasons mentioned above, we think that a perfunctory glance at Guizhou RedStar DevelopingLtd's statutory profits might make it look better than it really is on an underlying level. So while earnings quality is important, it's equally important to consider the risks facing Guizhou RedStar DevelopingLtd at this point in time. While conducting our analysis, we found that Guizhou RedStar DevelopingLtd has 2 warning signs and it would be unwise to ignore these.

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 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.