Why Talant Optronics (Suzhou)'s (SZSE:301045) Shaky Earnings Are Just The Beginning Of Its Problems

The subdued market reaction suggests that Talant Optronics (Suzhou) Co., Ltd.'s (SZSE:301045) recent earnings didn't contain any surprises. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

View our latest analysis for Talant Optronics (Suzhou)

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Talant Optronics (Suzhou) expanded the number of shares on issue by 6.9% 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. Check out Talant Optronics (Suzhou)'s historical EPS growth by clicking on this link.

How Is Dilution Impacting Talant Optronics (Suzhou)'s Earnings Per Share (EPS)?

Talant Optronics (Suzhou)'s net profit dropped by 92% per year over the last three years. Even looking at the last year, profit was still down 68%. Sadly, earnings per share fell further, down a full 66% in that time. And so, you can see quite clearly that dilution is influencing shareholder earnings.

If Talant Optronics (Suzhou)'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 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 Talant Optronics (Suzhou).

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that Talant Optronics (Suzhou)'s profit was boosted by unusual items worth CN¥2.3m in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. 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 that's as you'd expect, given these boosts are described as 'unusual'. We can see that Talant Optronics (Suzhou)'s 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 Talant Optronics (Suzhou)'s Profit Performance

In its last report Talant Optronics (Suzhou) 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 Talant Optronics (Suzhou)'s profits probably give an overly generous impression of its sustainable level of profitability. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Our analysis shows 5 warning signs for Talant Optronics (Suzhou) (1 shouldn't be ignored!) and we strongly recommend you look at these before investing.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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. 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.