Why Wuxi Chipown Micro-electronics' (SHSE:688508) Soft Earnings Are Just The Beginning Of Its Problems

Wuxi Chipown Micro-electronics limited's (SHSE:688508) lackluster earnings announcement last week disappointed investors. We looked deeper and believe that there is even more to be worried about, beyond the soft profit numbers.

View our latest analysis for Wuxi Chipown Micro-electronics

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Wuxi Chipown Micro-electronics issued 15% more new shares over the last year. That means its earnings are split among 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 Wuxi Chipown Micro-electronics' EPS by clicking here.

How Is Dilution Impacting Wuxi Chipown Micro-electronics' Earnings Per Share (EPS)?

Wuxi Chipown Micro-electronics' net profit dropped by 40% per year over the last three years. And even focusing only on the last twelve months, we see profit is down 34%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 37% in the same period. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, if Wuxi Chipown Micro-electronics' 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 Wuxi Chipown Micro-electronics' profit was boosted by unusual items worth CN¥17m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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. We can see that Wuxi Chipown Micro-electronics' positive unusual items were quite significant relative to its profit in the year to December 2023. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Wuxi Chipown Micro-electronics' Profit Performance

In its last report Wuxi Chipown Micro-electronics 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 Wuxi Chipown Micro-electronics' profits probably give an overly generous impression of its sustainable level of profitability. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Case in point: We've spotted 3 warning signs for Wuxi Chipown Micro-electronics you should be aware of.

Our examination of Wuxi Chipown Micro-electronics 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 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.