Beijing Gas Blue Sky Holdings (HKG:6828) Is Posting Healthy Earnings, But It Is Not All Good News

We didn't see Beijing Gas Blue Sky Holdings Limited's (HKG:6828) stock surge when it reported robust earnings recently. We think that investors might be worried about the foundations the earnings are built on.

Check out our latest analysis for Beijing Gas Blue Sky Holdings

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Beijing Gas Blue Sky Holdings issued 75% more new shares over the last year. As a result, its net income is now split between a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. You can see a chart of Beijing Gas Blue Sky Holdings' EPS by clicking here.

A Look At The Impact Of Beijing Gas Blue Sky Holdings' Dilution On Its Earnings Per Share (EPS)

Beijing Gas Blue Sky 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). So you can see that the dilution has had a fairly significant impact on shareholders.

In the long term, if Beijing Gas Blue Sky 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Beijing Gas Blue Sky Holdings.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that Beijing Gas Blue Sky Holdings' profit was boosted by unusual items worth HK$66m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. Beijing Gas Blue Sky Holdings had a rather significant contribution from unusual items relative to its profit to June 2023. 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 Beijing Gas Blue Sky Holdings' Profit Performance

To sum it all up, Beijing Gas Blue Sky 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, Beijing Gas Blue Sky 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. Be aware that Beijing Gas Blue Sky Holdings is showing 3 warning signs in our investment analysis and 2 of those don't sit too well with us...

Our examination of Beijing Gas Blue Sky 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 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. 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.