State Energy Group International Assets Holdings' (HKG:918) Anemic Earnings Might Be Worse Than You Think

State Energy Group International Assets Holdings Limited's (HKG:918) recent weak earnings report didn't cause a big stock movement. However, we believe that investors should be aware of some underlying factors which may be of concern.

Check out our latest analysis for State Energy Group International Assets Holdings

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, State Energy Group International Assets Holdings increased the number of shares on issue by 393% over the last twelve months by issuing new shares. That means its earnings are split among a greater number of shares. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. You can see a chart of State Energy Group International Assets Holdings' EPS by clicking here.

A Look At The Impact Of State Energy Group International Assets Holdings' Dilution on Its Earnings Per Share (EPS).

State Energy Group International Assets Holdings was losing money three years ago. Even looking at the last year, profit was still down 33%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 57% in the same period. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

If State Energy Group International Assets Holdings' EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of State Energy Group International Assets Holdings.

How Do Unusual Items Influence Profit?

On top of the dilution, we should also consider the HK$1.9m 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, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect State Energy Group International Assets Holdings to produce a higher profit next year, all else being equal.

Our Take On State Energy Group International Assets Holdings' Profit Performance

To sum it all up, State Energy Group International Assets Holdings took a hit from unusual items which pushed its profit down; without that, it would have made more money. 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. Based on these factors, we think it's very unlikely that State Energy Group International Assets Holdings' statutory profits make it seem much weaker than it is. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Every company has risks, and we've spotted 4 warning signs for State Energy Group International Assets Holdings (of which 1 is potentially serious!) you should know about.

Our examination of State Energy Group International Assets Holdings 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. 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.