China Aoyuan Group (HKG:3883) Is Posting Solid Earnings, But It Is Not All Good News

Shareholders didn't seem to be thrilled with China Aoyuan Group Limited's (HKG:3883) recent earnings report, despite healthy profit numbers. Our analysis suggests they may be concerned about some underlying details.

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One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. China Aoyuan Group expanded the number of shares on issue by 14% over the last year. That means its earnings are split among 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 China Aoyuan Group's EPS by clicking here.

A Look At The Impact Of China Aoyuan Group's Dilution On Its Earnings Per Share (EPS)

China Aoyuan Group 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. What we do know is that while it's great to see a profit over the last twelve months, that profit would have been better, on a per share basis, if the company hadn't needed to issue shares. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, if China Aoyuan Group's earnings per share can increase, then the share price should too. 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 China Aoyuan Group.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that China Aoyuan Group's profit was boosted by unusual items worth CN¥24b in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. China Aoyuan Group had a rather significant contribution from unusual items relative to its profit to December 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On China Aoyuan Group's Profit Performance

To sum it all up, China Aoyuan Group got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. And furthermore, it went and issued plenty of new shares, ensuring that each shareholder (who did not tip more money in) now owns a smaller proportion of the company. Considering all this we'd argue China Aoyuan Group's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into China Aoyuan Group, you'd also look into what risks it is currently facing. When we did our research, we found 4 warning signs for China Aoyuan Group (2 are concerning!) that we believe deserve your full attention.

Our examination of China Aoyuan Group has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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.