We Think That There Are More Issues For Zhuhai Huafa PropertiesLtd (SHSE:600325) Than Just Sluggish Earnings

Zhuhai Huafa Properties Co.,Ltd's (SHSE:600325) earnings announcement last week contained some soft numbers, disappointing investors. We did some digging and believe that things are better than they seem due to some encouraging factors.

View our latest analysis for Zhuhai Huafa PropertiesLtd

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Zhuhai Huafa PropertiesLtd expanded the number of shares on issue by 30% over the last year. Therefore, each share now receives a smaller portion of profit. 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 Zhuhai Huafa PropertiesLtd's EPS by clicking here.

A Look At The Impact Of Zhuhai Huafa PropertiesLtd's Dilution On Its Earnings Per Share (EPS)

Unfortunately, Zhuhai Huafa PropertiesLtd's profit is down 42% per year over three years. And even focusing only on the last twelve months, we see profit is down 31%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 35% in the same period. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

If Zhuhai Huafa PropertiesLtd's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that Zhuhai Huafa PropertiesLtd's profit suffered from unusual items, which reduced profit by CN¥575m in the last twelve months. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. 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 Zhuhai Huafa PropertiesLtd 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 Zhuhai Huafa PropertiesLtd's Profit Performance

Zhuhai Huafa PropertiesLtd 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 unfortunately the dilution means that shareholders now own a smaller proportion of the company (assuming they maintained the same number of shares). That will weigh on earnings per share, even if it is not reflected in net income. Based on these factors, we think it's very unlikely that Zhuhai Huafa PropertiesLtd's statutory profits make it seem much weaker than it is. So while earnings quality is important, it's equally important to consider the risks facing Zhuhai Huafa PropertiesLtd at this point in time. For example - Zhuhai Huafa PropertiesLtd has 4 warning signs we think you should be aware of.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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. 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.