Here's Why We Don't Think E-House (China) Enterprise Holdings's (HKG:2048) Statutory Earnings Reflect Its Underlying Earnings Potential

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. In this article, we'll look at how useful this year's statutory profit is, when analysing E-House (China) Enterprise Holdings (HKG:2048).

While E-House (China) Enterprise Holdings was able to generate revenue of CN¥7.61b in the last twelve months, we think its profit result of CN¥312.9m was more important. As you can see in the chart below, its profit has declined over the last three years, even though its revenue has increased.

Check out our latest analysis for E-House (China) Enterprise Holdings

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. Therefore, today we will consider the nature of E-House (China) Enterprise Holdings' statutory earnings with reference to its dilution of shareholders and the impact of unusual items. 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.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, E-House (China) Enterprise Holdings increased the number of shares on issue by 26% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. 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 E-House (China) Enterprise Holdings' EPS by clicking here.

A Look At The Impact Of E-House (China) Enterprise Holdings' Dilution on Its Earnings Per Share (EPS).

Unfortunately, E-House (China) Enterprise Holdings' profit is down 25% per year over three years. Even looking at the last year, profit was still down 70%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 69% in the same period. So you can see that the dilution has had a fairly significant impact on shareholders.

In the long term, if E-House (China) Enterprise Holdings' 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 the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that E-House (China) Enterprise Holdings' profit was boosted by unusual items worth CN¥94m 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. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. If E-House (China) Enterprise Holdings doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On E-House (China) Enterprise Holdings' Profit Performance

In its last report E-House (China) Enterprise Holdings benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. 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. For the reasons mentioned above, we think that a perfunctory glance at E-House (China) Enterprise Holdings' statutory profits might make it look better than it really is on an underlying level. So while earnings quality is important, it's equally important to consider the risks facing E-House (China) Enterprise Holdings at this point in time. For example, we've found that E-House (China) Enterprise Holdings has 5 warning signs (1 is potentially serious!) that deserve your attention before going any further with your analysis.

Our examination of E-House (China) Enterprise Holdings 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 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 that insiders are buying to be useful.

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This article by Simply Wall St is general in nature. 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.
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