We Think That There Are More Issues For Huaibei Mining HoldingsLtd (SHSE:600985) Than Just Sluggish Earnings

A lackluster earnings announcement from Huaibei Mining Holdings Co.,Ltd. (SHSE:600985) last week didn't sink the stock price. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

View our latest analysis for Huaibei Mining HoldingsLtd

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Huaibei Mining HoldingsLtd issued 8.6% 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 Huaibei Mining HoldingsLtd's EPS by clicking here.

How Is Dilution Impacting Huaibei Mining HoldingsLtd's Earnings Per Share (EPS)?

As you can see above, Huaibei Mining HoldingsLtd has been growing its net income over the last few years, with an annualized gain of 18% over three years. In comparison, earnings per share only gained 3.7% over the same period. Net profit actually dropped by 23% in the last year. But the EPS result was even worse, with the company recording a decline of 26%. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, if Huaibei Mining HoldingsLtd'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.

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.

Operating Revenue Or Not?

Companies will classify their revenue streams as either operating revenue or other revenue. Where possible, we prefer rely on operating revenue to get a better understanding of how the business is functioning. However, we note that when non-operating revenue increases suddenly, it will sometimes generate an unsustainable boost to profit. As well as the aforementioned dilution, Huaibei Mining HoldingsLtd saw a spike in non-operating revenue, over the last year. Indeed, its non-operating revenue rose from CN¥34.2b last year to CN¥41.6b this year. The high levels of non-operating revenue are problematic because if (and when) they do not repeat, then overall revenue (and profitability) of the firm will fall. Sometimes, you can get a better idea of the underlying earnings potential of a company by excluding unusual boosts to non-operating revenue.

Our Take On Huaibei Mining HoldingsLtd's Profit Performance

In its last report Huaibei Mining HoldingsLtd benefitted from a spike in non-operating revenue which may make its top line look unsustainably good, and even flow down to its profit. 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 Huaibei Mining HoldingsLtd's profits probably give an overly generous impression of its sustainable level of profitability. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Case in point: We've spotted 3 warning signs for Huaibei Mining HoldingsLtd you should be aware of.

Our examination of Huaibei Mining HoldingsLtd 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. 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.