Solid Earnings May Not Tell The Whole Story For Zhuzhou Smelter GroupLtd (SHSE:600961)

Zhuzhou Smelter Group Co.,Ltd.'s (SHSE:600961 ) stock didn't jump after it announced some healthy earnings. We think that investors might be worried about some concerning underlying factors.

Check out our latest analysis for Zhuzhou Smelter GroupLtd

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Zhuzhou Smelter GroupLtd increased the number of shares on issue by 17% over the last twelve months by issuing new shares. That means its earnings are split among 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 Zhuzhou Smelter GroupLtd's EPS by clicking here.

A Look At The Impact Of Zhuzhou Smelter GroupLtd's Dilution On Its Earnings Per Share (EPS)

As you can see above, Zhuzhou Smelter GroupLtd has been growing its net income over the last few years, with an annualized gain of 261% over three years. But EPS was only up 63% per year, in the exact same period. And the 23% profit boost in the last year certainly seems impressive at first glance. But earnings per share are actually down 3.8%, over the last twelve months. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, if Zhuzhou Smelter GroupLtd's earnings per share can increase, then the share price should too. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

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 Zhuzhou Smelter GroupLtd's profit was boosted by unusual items worth CN¥70m in the last twelve months. 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. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Zhuzhou Smelter GroupLtd's Profit Performance

In its last report Zhuzhou Smelter GroupLtd 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. Considering all this we'd argue Zhuzhou Smelter GroupLtd's profits probably give an overly generous impression of its sustainable level of profitability. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. While conducting our analysis, we found that Zhuzhou Smelter GroupLtd has 2 warning signs and it would be unwise to ignore these bad boys.

Our examination of Zhuzhou Smelter 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 are plenty of other ways to inform your opinion of a company. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.