Shanghai Highly (Group) Co., Ltd. (SHSE:600619) recently released a strong earnings report, and the market responded by raising the share price. However, we think that shareholders should be aware of some other factors beyond the profit numbers.

Check out our latest analysis for Shanghai Highly (Group)

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Shanghai Highly (Group) increased the number of shares on issue by 23% over the last twelve months by issuing new shares. That means its earnings are split among 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 Shanghai Highly (Group)'s EPS by clicking here.

A Look At The Impact Of Shanghai Highly (Group)'s Dilution on Its Earnings Per Share (EPS).

As you can see above, Shanghai Highly (Group) has been growing its net income over the last few years, with an annualized gain of 3.8% over three years. In contrast, earnings per share were actually down by 8.9% per year, in the exact same period. And the 91% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 81% in that time. So you can see that the dilution has had a fairly significant impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So Shanghai Highly (Group) shareholders will want to see that EPS figure continue to increase. 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 Shanghai Highly (Group).

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted Shanghai Highly (Group)'s net profit by CN¥183m over the last year. 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. Which is hardly surprising, given the name. We can see that Shanghai Highly (Group)'s positive unusual items were quite significant relative to its profit in the year to March 2022. 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 Shanghai Highly (Group)'s Profit Performance

In its last report Shanghai Highly (Group) benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. On top of that, the dilution means that its earnings per share performance is worse than its profit performance. Considering all this we'd argue Shanghai Highly (Group)'s profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about Shanghai Highly (Group) as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 4 warning signs for Shanghai Highly (Group) (of which 1 is potentially serious!) you should know about.

Our examination of Shanghai Highly (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. 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. 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.