We Think You Should Be Aware Of Some Concerning Factors In Sichuan New Energy Power's (SZSE:000155) Earnings

Following the solid earnings report from Sichuan New Energy Power Company Limited (SZSE:000155), the market responded by bidding up the stock price. However, we think that shareholders should be cautious as we found some worrying factors underlying the profit.

Check out our latest analysis for Sichuan New Energy Power

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Sichuan New Energy Power expanded the number of shares on issue by 10% 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 Sichuan New Energy Power's historical EPS growth by clicking on this link.

A Look At The Impact Of Sichuan New Energy Power's Dilution On Its Earnings Per Share (EPS)

Sichuan New Energy Power has improved its profit over the last three years, with an annualized gain of 195% in that time. But EPS was only up 152% per year, in the exact same period. And at a glance the 24% gain in profit over the last year impresses. On the other hand, earnings per share are only up 24% 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 it will certainly be a positive for shareholders if Sichuan New Energy Power can grow EPS persistently. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. 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 Sichuan New Energy Power's Profit Performance

Sichuan New Energy Power 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 Sichuan New Energy Power's true underlying earnings power is actually less than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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 Sichuan New Energy Power at this point in time. To that end, you should learn about the 2 warning signs we've spotted with Sichuan New Energy Power (including 1 which is concerning).

Today we've zoomed in on a single data point to better understand the nature of Sichuan New Energy Power's profit. 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.