Some Investors May Be Willing To Look Past Guangzhou Hengyun Enterprises Holding's (SZSE:000531) Soft Earnings

The market for Guangzhou Hengyun Enterprises Holding Ltd's (SZSE:000531) shares didn't move much after it posted weak earnings recently. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

See our latest analysis for Guangzhou Hengyun Enterprises Holding

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Guangzhou Hengyun Enterprises Holding expanded the number of shares on issue by 27% over the last year. That means its earnings are split among a greater number of shares. 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 Guangzhou Hengyun Enterprises Holding's historical EPS growth by clicking on this link.

How Is Dilution Impacting Guangzhou Hengyun Enterprises Holding's Earnings Per Share (EPS)?

As it happens, we don't know how much the company made or lost three years ago, because we don't have the data. And even focusing only on the last twelve months, we see profit is down 10%. Sadly, earnings per share fell further, down a full 26% in that time. So you can see that the dilution has had a fairly significant impact on shareholders.

In the long term, if Guangzhou Hengyun Enterprises Holding'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.

The Impact Of Unusual Items On Profit

On top of the dilution, we should also consider the CN¥199m impact of unusual items in the last year, which had the effect of suppressing profit. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. Guangzhou Hengyun Enterprises Holding took a rather significant hit from unusual items in the year to September 2024. As a result, we can surmise that the unusual items made its statutory profit significantly weaker than it would otherwise be.

Our Take On Guangzhou Hengyun Enterprises Holding's Profit Performance

Guangzhou Hengyun Enterprises Holding suffered from unusual items which depressed its profit in its last report; if that is not repeated then profit should be higher, all else being equal. But on the other hand, the company issued more shares, so without buying more shares each shareholder will end up with a smaller part of the profit. Considering all the aforementioned, we'd venture that Guangzhou Hengyun Enterprises Holding's profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Case in point: We've spotted 4 warning signs for Guangzhou Hengyun Enterprises Holding you should be mindful of and 1 of these bad boys is a bit concerning.

Our examination of Guangzhou Hengyun Enterprises Holding has focussed on certain factors that can make its earnings look better than they are. 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.

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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.