Daqin Railway's (SHSE:601006) Sluggish Earnings Might Be Just The Beginning Of Its Problems

The subdued market reaction suggests that Daqin Railway Co., Ltd.'s (SHSE:601006) recent earnings didn't contain any surprises. We think that investors are worried about some weaknesses underlying the earnings.

View our latest analysis for Daqin Railway

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Daqin Railway expanded the number of shares on issue by 19% 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 Daqin Railway's EPS by clicking here.

How Is Dilution Impacting Daqin Railway's Earnings Per Share (EPS)?

Unfortunately, Daqin Railway's profit is down 23% per year over three years. Even looking at the last year, profit was still down 18%. Sadly, earnings per share fell further, down a full 26% in that time. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, if Daqin Railway's 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 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 Daqin Railway's Profit Performance

Over the last year Daqin Railway issued new shares and so, there's a noteworthy divergence between EPS and net income growth. Because of this, we think that it may be that Daqin Railway's statutory profits are better than its underlying earnings power. In further bad news, its earnings per share decreased in the last year. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. To that end, you should learn about the 2 warning signs we've spotted with Daqin Railway (including 1 which is significant).

This note has only looked at a single factor that sheds light on the nature of Daqin Railway's profit. But there are plenty of other ways to inform your opinion of a company. 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 with high insider ownership.

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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.