Zhejiang Huayou Cobalt's (SHSE:603799) Anemic Earnings Might Be Worse Than You Think

The market wasn't impressed with the soft earnings from Zhejiang Huayou Cobalt Co., Ltd (SHSE:603799) recently. We did some analysis, and found that there are some reasons to be cautious about the headline numbers.

Check out our latest analysis for Zhejiang Huayou Cobalt

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Zhejiang Huayou Cobalt issued 6.1% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. 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 Zhejiang Huayou Cobalt's EPS by clicking here.

A Look At The Impact Of Zhejiang Huayou Cobalt's Dilution On Its Earnings Per Share (EPS)

As you can see above, Zhejiang Huayou Cobalt has been growing its net income over the last few years, with an annualized gain of 74% over three years. But EPS was only up 60% per year, in the exact same period. Net profit actually dropped by 24% in the last year. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 26%. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, if Zhejiang Huayou Cobalt'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.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted Zhejiang Huayou Cobalt's net profit by CN¥343m over the last year. 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 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. And, after all, that's exactly what the accounting terminology implies. 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 Zhejiang Huayou Cobalt's Profit Performance

To sum it all up, Zhejiang Huayou Cobalt 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. For the reasons mentioned above, we think that a perfunctory glance at Zhejiang Huayou Cobalt's statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into Zhejiang Huayou Cobalt, you'd also look into what risks it is currently facing. For example, we've found that Zhejiang Huayou Cobalt has 3 warning signs (1 is a bit concerning!) that deserve your attention before going any further with your analysis.

Our examination of Zhejiang Huayou Cobalt 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 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.