Investors Can Find Comfort In GOME Retail Holdings' (HKG:493) Earnings Quality

The market shrugged off the recent earnings report from GOME Retail Holdings Limited (HKG:493), despite the profit numbers being soft. We think that investors might be looking at some positive factors beyond the earnings numbers.

See our latest analysis for GOME Retail Holdings

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. GOME Retail Holdings expanded the number of shares on issue by 11% 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. Check out GOME Retail Holdings' historical EPS growth by clicking on this link.

How Is Dilution Impacting GOME Retail Holdings' Earnings Per Share? (EPS)

Three years ago, GOME Retail Holdings lost money. And even focusing only on the last twelve months, we see profit is down 92%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 92% in the same period. So you can see that the dilution has had a bit of an impact on shareholders.

If GOME Retail 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.

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

Alongside that dilution, it's also important to note that GOME Retail Holdings' profit suffered from unusual items, which reduced profit by CN¥118m in the last twelve months. 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 GOME Retail Holdings 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 GOME Retail Holdings' Profit Performance

To sum it all up, GOME Retail Holdings took a hit from unusual items which pushed its profit down; without that, it would have made more money. But unfortunately the dilution means that shareholders now own a smaller proportion of the company (assuming they maintained the same number of shares). That will weigh on earnings per share, even if it is not reflected in net income. Based on these factors, it's hard to tell if GOME Retail Holdings' profits are a reasonable reflection of its underlying profitability. So while earnings quality is important, it's equally important to consider the risks facing GOME Retail Holdings at this point in time. To that end, you should learn about the 5 warning signs we've spotted with GOME Retail Holdings (including 1 which is a bit concerning).

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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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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