Yunnan Energy New Material's (SZSE:002812) Anemic Earnings Might Be Worse Than You Think

The market rallied behind Yunnan Energy New Material Co., Ltd.'s (SZSE:002812) 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 Yunnan Energy New Material

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Yunnan Energy New Material expanded the number of shares on issue by 8.6% 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 Yunnan Energy New Material's EPS by clicking here.

How Is Dilution Impacting Yunnan Energy New Material's Earnings Per Share (EPS)?

Yunnan Energy New Material has improved its profit over the last three years, with an annualized gain of 44% in that time. But EPS was only up 27% per year, in the exact same period. Net profit actually dropped by 45% in the last year. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 50%. Therefore, the dilution is having a noteworthy influence on shareholder returns.

If Yunnan Energy New Material's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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

Alongside that dilution, it's also important to note that Yunnan Energy New Material's profit was boosted by unusual items worth CN¥192m 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. 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, 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 Yunnan Energy New Material's Profit Performance

In its last report Yunnan Energy New Material 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 Yunnan Energy New Material'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. While conducting our analysis, we found that Yunnan Energy New Material has 3 warning signs and it would be unwise to ignore these.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.