Wuxi Zhenhua Auto Parts Co.,Ltd.'s (SHSE:605319) robust earnings report didn't manage to move the market for its stock. We did some digging, and we found some concerning factors in the details.
In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Wuxi Zhenhua Auto PartsLtd expanded the number of shares on issue by 5.5% over the last year. 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. Check out Wuxi Zhenhua Auto PartsLtd's historical EPS growth by clicking on this link.
How Is Dilution Impacting Wuxi Zhenhua Auto PartsLtd's Earnings Per Share (EPS)?
As you can see above, Wuxi Zhenhua Auto PartsLtd has been growing its net income over the last few years, with an annualized gain of 163% over three years. In comparison, earnings per share only gained 58% over the same period. And the 71% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 71% in that time. So you can see that the dilution has had a bit of an impact on shareholders.
In the long term, earnings per share growth should beget share price growth. So Wuxi Zhenhua Auto PartsLtd 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 the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.
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.
Our Take On Wuxi Zhenhua Auto PartsLtd's Profit Performance
Each Wuxi Zhenhua Auto PartsLtd share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Therefore, it seems possible to us that Wuxi Zhenhua Auto PartsLtd's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 58% per annum growth in EPS for the last three. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. At Simply Wall St, we found 2 warning signs for Wuxi Zhenhua Auto PartsLtd and we think they deserve your attention.
This note has only looked at a single factor that sheds light on the nature of Wuxi Zhenhua Auto PartsLtd's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.