Concerns Surrounding Guangzhou Haige Communications Group's (SZSE:002465) Performance

Following the solid earnings report from Guangzhou Haige Communications Group Incorporated Company (SZSE:002465), the market responded by bidding up the stock price. However, we think that shareholders should be cautious as we found some worrying factors underlying the profit.

See our latest analysis for Guangzhou Haige Communications Group

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Guangzhou Haige Communications Group increased the number of shares on issue by 7.7% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. 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 Guangzhou Haige Communications Group's EPS by clicking here.

A Look At The Impact Of Guangzhou Haige Communications Group's Dilution On Its Earnings Per Share (EPS)

Guangzhou Haige Communications Group has improved its profit over the last three years, with an annualized gain of 20% in that time. And over the last 12 months, the company grew its profit by 5.2%. But in comparison, EPS only increased by 3.5% over the same period. And so, you can see quite clearly that dilution is influencing shareholder earnings.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if Guangzhou Haige Communications Group can grow EPS persistently. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. 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

Finally, we should also consider the fact that unusual items boosted Guangzhou Haige Communications Group's net profit by CN¥119m over the last year. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And, after all, that's exactly what the accounting terminology implies. If Guangzhou Haige Communications Group doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Guangzhou Haige Communications Group's Profit Performance

To sum it all up, Guangzhou Haige Communications Group got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. 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 Guangzhou Haige Communications Group's profits probably give an overly generous impression of its sustainable level of profitability. So while earnings quality is important, it's equally important to consider the risks facing Guangzhou Haige Communications Group at this point in time. In terms of investment risks, we've identified 3 warning signs with Guangzhou Haige Communications Group, and understanding these should be part of your investment process.

Our examination of Guangzhou Haige Communications Group 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. 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.