Jiangxi Hongcheng EnvironmentLtd's (SHSE:600461) Earnings Are Weaker Than They Seem

Unsurprisingly, Jiangxi Hongcheng Environment Co.,Ltd.'s (SHSE:600461) stock price was strong on the back of its healthy earnings report. However, our analysis suggests that shareholders may be missing some factors that indicate the earnings result was not as good as it looked.

See our latest analysis for Jiangxi Hongcheng EnvironmentLtd

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Jiangxi Hongcheng EnvironmentLtd issued 13% more new shares over the last year. 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. Check out Jiangxi Hongcheng EnvironmentLtd's historical EPS growth by clicking on this link.

A Look At The Impact Of Jiangxi Hongcheng EnvironmentLtd's Dilution On Its Earnings Per Share (EPS)

Jiangxi Hongcheng EnvironmentLtd has improved its profit over the last three years, with an annualized gain of 63% in that time. But EPS was only up 41% per year, in the exact same period. And over the last 12 months, the company grew its profit by 13%. On the other hand, earnings per share are only up 7.6% in that time. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, earnings per share growth should beget share price growth. So Jiangxi Hongcheng EnvironmentLtd 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Jiangxi Hongcheng EnvironmentLtd.

Our Take On Jiangxi Hongcheng EnvironmentLtd's Profit Performance

Jiangxi Hongcheng EnvironmentLtd shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Therefore, it seems possible to us that Jiangxi Hongcheng EnvironmentLtd's true underlying earnings power is actually less than its statutory profit. Nonetheless, it's still worth noting that its earnings per share have grown at 41% over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So while earnings quality is important, it's equally important to consider the risks facing Jiangxi Hongcheng EnvironmentLtd at this point in time. For example, we've discovered 3 warning signs that you should run your eye over to get a better picture of Jiangxi Hongcheng EnvironmentLtd.

Today we've zoomed in on a single data point to better understand the nature of Jiangxi Hongcheng EnvironmentLtd'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.

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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.