China Zhenhua (Group) Science & Technology's (SZSE:000733) Shareholders Have More To Worry About Than Only Soft Earnings

Investors were disappointed by China Zhenhua (Group) Science & Technology Co., Ltd's (SZSE:000733 ) latest earnings release. Our analysis has found some reasons to be concerned, beyond the weak headline numbers.

See our latest analysis for China Zhenhua (Group) Science & Technology

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. China Zhenhua (Group) Science & Technology expanded the number of shares on issue by 6.5% over the last year. As a result, its net income is now split between 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. Check out China Zhenhua (Group) Science & Technology's historical EPS growth by clicking on this link.

How Is Dilution Impacting China Zhenhua (Group) Science & Technology's Earnings Per Share (EPS)?

As you can see above, China Zhenhua (Group) Science & Technology has been growing its net income over the last few years, with an annualized gain of 176% over three years. Net profit actually dropped by 18% in the last year. But the EPS result was even worse, with the company recording a decline of 20%. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, if China Zhenhua (Group) Science & Technology'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.

Our Take On China Zhenhua (Group) Science & Technology's Profit Performance

Over the last year China Zhenhua (Group) Science & Technology issued new shares and so, there's a noteworthy divergence between EPS and net income growth. Therefore, it seems possible to us that China Zhenhua (Group) Science & Technology's true underlying earnings power is actually less than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing China Zhenhua (Group) Science & Technology at this point in time. At Simply Wall St, we found 2 warning signs for China Zhenhua (Group) Science & Technology and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of China Zhenhua (Group) Science & Technology's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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.