Why Guangdong - Hong Kong Greater Bay Area Holdings' (HKG:1396) Healthy Earnings Aren’t As Good As They Seem

Guangdong - Hong Kong Greater Bay Area Holdings Limited's (HKG:1396) stock performed strongly after the recent earnings report. Investors should be cautious however, as there some causes of concern deeper in the numbers.

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One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Guangdong - Hong Kong Greater Bay Area Holdings issued 50% more new shares 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. Check out Guangdong - Hong Kong Greater Bay Area Holdings' historical EPS growth by clicking on this link.

A Look At The Impact Of Guangdong - Hong Kong Greater Bay Area Holdings' Dilution On Its Earnings Per Share (EPS)

Guangdong - Hong Kong Greater Bay Area Holdings was losing money three years ago. Zooming in to the last year, we still can't talk about growth rates coherently, since it made a loss last year. But mathematics aside, it is always good to see when a formerly unprofitable business come good (though we accept profit would have been higher if dilution had not been required). Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

If Guangdong - Hong Kong Greater Bay Area 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 Guangdong - Hong Kong Greater Bay Area Holdings.

How Do Unusual Items Influence Profit?

Finally, we should also consider the fact that unusual items boosted Guangdong - Hong Kong Greater Bay Area Holdings' net profit by CN¥1.1b over the last year. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. Which is hardly surprising, given the name. We can see that Guangdong - Hong Kong Greater Bay Area Holdings' positive unusual items were quite significant relative to its profit in the year to June 2025. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Guangdong - Hong Kong Greater Bay Area Holdings' Profit Performance

To sum it all up, Guangdong - Hong Kong Greater Bay Area Holdings got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. On top of that, the dilution means that its earnings per share performance is worse than its profit performance. For all the reasons mentioned above, we think that, at a glance, Guangdong - Hong Kong Greater Bay Area Holdings' statutory profits could be considered to be low quality, because they are likely to give investors an overly positive impression of the company. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. When we did our research, we found 3 warning signs for Guangdong - Hong Kong Greater Bay Area Holdings (1 doesn't sit too well with us!) that we believe deserve your full attention.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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.