Zhejiang Xinan Chemical Industrial GroupLtd's (SHSE:600596) Problems Go Beyond Poor Profit

Investors were disappointed with Zhejiang Xinan Chemical Industrial Group Co.,Ltd's (SHSE:600596) recent earnings. We think there is more to the story than simply soft profit numbers. Our analysis shows that there are some other factors of concern.

View our latest analysis for Zhejiang Xinan Chemical Industrial GroupLtd

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Zhejiang Xinan Chemical Industrial GroupLtd issued 18% more new shares over the last year. As a result, its net income is now split between a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of Zhejiang Xinan Chemical Industrial GroupLtd's EPS by clicking here.

How Is Dilution Impacting Zhejiang Xinan Chemical Industrial GroupLtd's Earnings Per Share (EPS)?

Unfortunately, Zhejiang Xinan Chemical Industrial GroupLtd's profit is down 95% per year over three years. And even focusing only on the last twelve months, we see profit is down 62%. Sadly, earnings per share fell further, down a full 67% in that time. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, if Zhejiang Xinan Chemical Industrial GroupLtd'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.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted Zhejiang Xinan Chemical Industrial GroupLtd's net profit by CN¥135m 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'. Zhejiang Xinan Chemical Industrial GroupLtd had a rather significant contribution from unusual items relative to its profit to September 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Zhejiang Xinan Chemical Industrial GroupLtd's Profit Performance

To sum it all up, Zhejiang Xinan Chemical Industrial GroupLtd 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 Zhejiang Xinan Chemical Industrial GroupLtd's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into Zhejiang Xinan Chemical Industrial GroupLtd, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 4 warning signs for Zhejiang Xinan Chemical Industrial GroupLtd (of which 1 is concerning!) you should know about.

Our examination of Zhejiang Xinan Chemical Industrial GroupLtd 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.

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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.