China Suntien Green Energy's (HKG:956) Solid Earnings May Rest On Weak Foundations

The recent earnings posted by China Suntien Green Energy Corporation Limited (HKG:956) were solid, but the stock didn't move as much as we expected. However the statutory profit number doesn't tell the whole story, and we have found some factors which might be of concern to shareholders.

Check out our latest analysis for China Suntien Green Energy

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, China Suntien Green Energy issued 8.8% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. 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 China Suntien Green Energy's EPS by clicking here.

A Look At The Impact Of China Suntien Green Energy's Dilution on Its Earnings Per Share (EPS).

China Suntien Green Energy has improved its profit over the last three years, with an annualized gain of 33% in that time. And over the last 12 months, the company grew its profit by 8.2%. On the other hand, earnings per share are only up 4.6% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if China Suntien Green Energy 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 China Suntien Green Energy's Profit Performance

Each China Suntien Green Energy share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Therefore, it seems possible to us that China Suntien Green Energy's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 44% per annum growth in EPS for the last three. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing China Suntien Green Energy at this point in time. For example, we've found that China Suntien Green Energy has 4 warning signs (1 is a bit unpleasant!) that deserve your attention before going any further with your analysis.

Today we've zoomed in on a single data point to better understand the nature of China Suntien Green Energy's profit. 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 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.