Zhangjiagang Haiguo New Energy Equipment Manufacturing's (SZSE:301063) Conservative Accounting Might Explain Soft Earnings

Shareholders appeared unconcerned with Zhangjiagang Haiguo New Energy Equipment Manufacturing Co., Ltd.'s (SZSE:301063) lackluster earnings report last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

Check out our latest analysis for Zhangjiagang Haiguo New Energy Equipment Manufacturing

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Zhangjiagang Haiguo New Energy Equipment Manufacturing issued 24% more new shares over the last year. That means its earnings are split among a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. You can see a chart of Zhangjiagang Haiguo New Energy Equipment Manufacturing's EPS by clicking here.

How Is Dilution Impacting Zhangjiagang Haiguo New Energy Equipment Manufacturing's Earnings Per Share (EPS)?

Zhangjiagang Haiguo New Energy Equipment Manufacturing's net profit dropped by 56% per year over the last three years. Even looking at the last year, profit was still down 48%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 55% in the same period. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

In the long term, if Zhangjiagang Haiguo New Energy Equipment Manufacturing'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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Zhangjiagang Haiguo New Energy Equipment Manufacturing.

How Do Unusual Items Influence Profit?

On top of the dilution, we should also consider the CN¥24m impact of unusual items in the last year, which had the effect of suppressing profit. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. If Zhangjiagang Haiguo New Energy Equipment Manufacturing doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Zhangjiagang Haiguo New Energy Equipment Manufacturing's Profit Performance

Zhangjiagang Haiguo New Energy Equipment Manufacturing suffered from unusual items which depressed its profit in its last report; if that is not repeated then profit should be higher, all else being equal. But on the other hand, the company issued more shares, so without buying more shares each shareholder will end up with a smaller part of the profit. Based on these factors, it's hard to tell if Zhangjiagang Haiguo New Energy Equipment Manufacturing's profits are a reasonable reflection of its underlying profitability. If you want to do dive deeper into Zhangjiagang Haiguo New Energy Equipment Manufacturing, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 6 warning signs for Zhangjiagang Haiguo New Energy Equipment Manufacturing (of which 1 shouldn't be ignored!) you should know about.

Our examination of Zhangjiagang Haiguo New Energy Equipment Manufacturing has focussed on certain factors that can make its earnings look better than they are. 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.