The market was pleased with the recent earnings report from Zhejiang Xinan Chemical Industrial Group Co.,Ltd (SHSE:600596), despite the profit numbers being soft. However, we think the company is showing some signs that things are more promising than they seem.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, Zhejiang Xinan Chemical Industrial GroupLtd issued 18% more new shares over the last year. As a result, its net income is now split between 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. Check out Zhejiang Xinan Chemical Industrial GroupLtd's historical EPS growth by clicking on this link.

A Look At The Impact Of Zhejiang Xinan Chemical Industrial GroupLtd's Dilution On Its Earnings Per Share (EPS)

Zhejiang Xinan Chemical Industrial GroupLtd's net profit dropped by 83% per year over the last three years. And even focusing only on the last twelve months, we see profit is down 92%. Sadly, earnings per share fell further, down a full 93% in that time. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, if Zhejiang Xinan Chemical Industrial GroupLtd'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.

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 Zhejiang Xinan Chemical Industrial GroupLtd's profit suffered from unusual items, which reduced profit by CN¥145m 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, after all, that's exactly what the accounting terminology implies. Zhejiang Xinan Chemical Industrial GroupLtd took a rather significant hit from unusual items in the year to March 2024. As a result, we can surmise that the unusual items made its statutory profit significantly weaker than it would otherwise be.

Our Take On Zhejiang Xinan Chemical Industrial GroupLtd's Profit Performance

Zhejiang Xinan Chemical Industrial GroupLtd suffered from unusual items which depressed its profit in its last report; if that is not repeated then profit should be higher, all else being equal. 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. Considering all the aforementioned, we'd venture that Zhejiang Xinan Chemical Industrial GroupLtd's profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For example, we've found that Zhejiang Xinan Chemical Industrial GroupLtd has 4 warning signs (1 is a bit concerning!) that deserve your attention before going any further with your analysis.

Our examination of Zhejiang Xinan Chemical Industrial GroupLtd has focussed on certain factors that can make its earnings look better than they are. 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.