China Merchants Expressway Network & Technology HoldingsLtd's (SZSE:001965) Earnings Are Of Questionable Quality

Despite posting some strong earnings, the market for China Merchants Expressway Network & Technology Holdings Co.,Ltd.'s (SZSE:001965) stock hasn't moved much. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

Check out our latest analysis for China Merchants Expressway Network & Technology HoldingsLtd

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. China Merchants Expressway Network & Technology HoldingsLtd expanded the number of shares on issue by 10% 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. Check out China Merchants Expressway Network & Technology HoldingsLtd's historical EPS growth by clicking on this link.

How Is Dilution Impacting China Merchants Expressway Network & Technology HoldingsLtd's Earnings Per Share (EPS)?

As you can see above, China Merchants Expressway Network & Technology HoldingsLtd has been growing its net income over the last few years, with an annualized gain of 204% over three years. And the 39% profit boost in the last year certainly seems impressive at first glance. But in comparison, EPS only increased by 40% over the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, earnings per share growth should beget share price growth. So China Merchants Expressway Network & Technology HoldingsLtd 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 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 Merchants Expressway Network & Technology HoldingsLtd's Profit Performance

Each China Merchants Expressway Network & Technology HoldingsLtd share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Therefore, it seems possible to us that China Merchants Expressway Network & Technology HoldingsLtd's true underlying earnings power is actually less than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example, we've found that China Merchants Expressway Network & Technology HoldingsLtd has 3 warning signs (1 shouldn't be ignored!) that deserve your attention before going any further with your analysis.

This note has only looked at a single factor that sheds light on the nature of China Merchants Expressway Network & Technology HoldingsLtd's profit. 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.

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.