Yuexiu Property's (HKG:123) Problems Go Beyond Weak Profit

The market shrugged off Yuexiu Property Company Limited's (HKG:123) weak earnings report last week. Our analysis suggests that there are some positive factors lying below the troubling profit numbers which investors are finding comfort in.

See our latest analysis for Yuexiu Property

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Yuexiu Property expanded the number of shares on issue by 30% over the last year. As a result, its net income is now split between a greater number of shares. 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 Yuexiu Property's EPS by clicking here.

How Is Dilution Impacting Yuexiu Property's Earnings Per Share (EPS)?

Yuexiu Property's net profit dropped by 25% per year over the last three years. And even focusing only on the last twelve months, we see profit is down 19%. Sadly, earnings per share fell further, down a full 33% in that time. So you can see that the dilution has had a fairly significant impact on shareholders.

If Yuexiu Property's 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.

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

On top of the dilution, we should also consider the CN¥1.5b impact of unusual items in the last year, which had the effect of suppressing profit. 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 that's hardly a surprise given these line items are considered unusual. If Yuexiu Property doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Yuexiu Property's Profit Performance

Yuexiu Property 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. Having considered these factors, we don't think Yuexiu Property's statutory profits give an overly harsh view of the business. So while earnings quality is important, it's equally important to consider the risks facing Yuexiu Property at this point in time. For example, we've found that Yuexiu Property has 3 warning signs (1 doesn't sit too well with us!) that deserve your attention before going any further with your analysis.

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. 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.