Weak Statutory Earnings May Not Tell The Whole Story For Huaibei Mining HoldingsLtd (SHSE:600985)

The market rallied behind Huaibei Mining Holdings Co.,Ltd.'s (SHSE:600985) stock, leading do a rise in the share price after its recent weak earnings report. We think that shareholders might be missing some concerning factors that our analysis found.

Check out 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. 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 Huaibei Mining HoldingsLtd's EPS by clicking here.

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

Huaibei Mining HoldingsLtd has improved its profit over the last three years, with an annualized gain of 49% in that time. But EPS was only up 30% per year, in the exact same period. Net profit actually dropped by 24% in the last year. But the EPS result was even worse, with the company recording a decline of 24%. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, if Huaibei Mining HoldingsLtd'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 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 Huaibei Mining HoldingsLtd's profit was boosted by unusual items worth CN¥506m in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. If Huaibei Mining HoldingsLtd doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Huaibei Mining HoldingsLtd's Profit Performance

In its last report Huaibei Mining HoldingsLtd benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. And furthermore, it went and issued plenty of new shares, ensuring that each shareholder (who did not tip more money in) now owns a smaller proportion of the company. Considering all this we'd argue Huaibei Mining HoldingsLtd's profits probably give an overly generous impression of its sustainable level of profitability. So while earnings quality is important, it's equally important to consider the risks facing Huaibei Mining HoldingsLtd at this point in time. You'd be interested to know, that we found 2 warning signs for Huaibei Mining HoldingsLtd and you'll want to know about them.

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. 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.