Beibu Gulf Port's (SZSE:000582) Profits Appear To Have Quality Issues

The stock price didn't jump after Beibu Gulf Port Co., Ltd. (SZSE:000582) posted decent earnings last week. Our analysis showed that there are some concerning factors in the earnings that investors may be cautious of.

View our latest analysis for Beibu Gulf Port

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Beibu Gulf Port issued 29% more new shares over the last year. As a result, its net income is now split between a greater number of shares. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. You can see a chart of Beibu Gulf Port's EPS by clicking here.

A Look At The Impact Of Beibu Gulf Port's Dilution On Its Earnings Per Share (EPS)

Beibu Gulf Port has improved its profit over the last three years, with an annualized gain of 8.1% in that time. In contrast, earnings per share were actually down by 5.4% per year, in the exact same period. And over the last 12 months, the company grew its profit by 7.5%. On the other hand, earnings per share are only up 2.0% in that time. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Beibu Gulf Port shareholders will want to see that EPS figure continue to increase. 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Beibu Gulf Port.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted Beibu Gulf Port's net profit by CN¥184m over the last year. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Beibu Gulf Port's Profit Performance

To sum it all up, Beibu Gulf Port got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. 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. For the reasons mentioned above, we think that a perfunctory glance at Beibu Gulf Port's statutory profits might make it look better than it really is on an underlying level. So while earnings quality is important, it's equally important to consider the risks facing Beibu Gulf Port at this point in time. Case in point: We've spotted 2 warning signs for Beibu Gulf Port you should be aware of.

Our examination of Beibu Gulf Port 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 with significant insider holdings to be useful.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.