We Believe That Future Machine's (HKG:1401) Weak Earnings Are A Good Indicator Of Underlying Profitability

Future Machine Limited's (HKG:1401) lackluster earnings announcement last week disappointed investors. We looked deeper and believe that there is even more to be worried about, beyond the soft profit numbers.

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One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Future Machine expanded the number of shares on issue by 50% over the last year. That means its earnings are split among a greater number of shares. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. You can see a chart of Future Machine's EPS by clicking here.

A Look At The Impact Of Future Machine's Dilution On Its Earnings Per Share (EPS)

Unfortunately, Future Machine's profit is down 26% per year over three years. And even focusing only on the last twelve months, we see profit is down 46%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 46% in the same period. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

In the long term, if Future Machine's earnings per share can increase, then the share price should too. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. 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 Future Machine.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that Future Machine's profit was boosted by unusual items worth CN¥34m 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 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. And, after all, that's exactly what the accounting terminology implies. Future Machine had a rather significant contribution from unusual items relative to its profit 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 Future Machine's Profit Performance

To sum it all up, Future Machine 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, Future Machine's statutory profits could be considered to be low quality, because they are likely to give investors an overly positive impression of the company. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example, Future Machine has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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 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 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.