Dongfang Electric's (HKG:1072) Weak Earnings May Only Reveal A Part Of The Whole Picture

A lackluster earnings announcement from Dongfang Electric Corporation Limited (HKG:1072) last week didn't sink the stock price. We think that investors are worried about some weaknesses underlying the earnings.

We've discovered 1 warning sign about Dongfang Electric. View them for free.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Dongfang Electric increased the number of shares on issue by 8.8% over the last twelve months by issuing new shares. 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. You can see a chart of Dongfang Electric's EPS by clicking here.

How Is Dilution Impacting Dongfang Electric's Earnings Per Share (EPS)?

Dongfang Electric has improved its profit over the last three years, with an annualized gain of 23% in that time. Net profit actually dropped by 7.8% in the last year. But the EPS result was even worse, with the company recording a decline of 7.7%. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, if Dongfang Electric'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

Finally, we should also consider the fact that unusual items boosted Dongfang Electric's net profit by CN¥363m 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 crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that Dongfang Electric's positive unusual items were quite significant relative to its profit in the year to March 2025. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Dongfang Electric's Profit Performance

In its last report Dongfang Electric benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. 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. Considering all this we'd argue Dongfang Electric's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into Dongfang Electric, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 1 warning sign for Dongfang Electric you should know about.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. But there are plenty of other ways to inform your opinion of a company. 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.