Earnings Troubles May Signal Larger Issues for China Energy Development Holdings (HKG:228) Shareholders

The latest earnings report from China Energy Development Holdings Limited (HKG:228 ) disappointed investors. We did some digging and believe that things are better than they seem due to some encouraging factors.

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In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, China Energy Development Holdings issued 28% more new shares over the last year. As a result, its net income is now split between 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 China Energy Development Holdings' historical EPS growth by clicking on this link.

A Look At The Impact Of China Energy Development Holdings' Dilution On Its Earnings Per Share (EPS)

Unfortunately, China Energy Development Holdings' profit is down 78% per year over three years. And even focusing only on the last twelve months, we see profit is down 61%. Sadly, earnings per share fell further, down a full 66% in that time. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

If China Energy Development 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 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 China Energy Development Holdings.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that China Energy Development Holdings' profit suffered from unusual items, which reduced profit by HK$20m in the last twelve months. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect China Energy Development Holdings to produce a higher profit next year, all else being equal.

Our Take On China Energy Development Holdings' Profit Performance

China Energy Development Holdings 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. Based on these factors, we think it's very unlikely that China Energy Development Holdings' statutory profits make it seem much weaker than it is. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. While conducting our analysis, we found that China Energy Development Holdings has 4 warning signs and it would be unwise to ignore them.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.