We Think That There Are More Issues For Shougang Century Holdings (HKG:103) Than Just Sluggish Earnings

The subdued market reaction suggests that Shougang Century Holdings Limited's (HKG:103) recent earnings didn't contain any surprises. However, we believe that investors should be aware of some underlying factors which may be of concern.

We've discovered 3 warning signs about Shougang Century Holdings. View them for free.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Shougang Century Holdings increased the number of shares on issue by 20% over the last twelve months by issuing new shares. As a result, its net income is now split between 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 Shougang Century Holdings' EPS by clicking here.

A Look At The Impact Of Shougang Century Holdings' Dilution On Its Earnings Per Share (EPS)

Unfortunately, Shougang Century Holdings' profit is down 61% per year over three years. Even looking at the last year, profit was still down 49%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 51% in the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

If Shougang Century Holdings' EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. 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 Shougang Century Holdings.

How Do Unusual Items Influence Profit?

On top of the dilution, we should also consider the HK$3.9m 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. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Shougang Century Holdings to produce a higher profit next year, all else being equal.

Our Take On Shougang Century Holdings' Profit Performance

Shougang Century 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 Shougang Century Holdings' statutory profits make it seem much weaker than it is. If you want to do dive deeper into Shougang Century Holdings, you'd also look into what risks it is currently facing. Case in point: We've spotted 3 warning signs for Shougang Century Holdings you should be aware of.

Our examination of Shougang Century 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. 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.