The market shrugged off Zhuzhou Smelter Group Co.,Ltd.'s (SHSE:600961) solid earnings report. We did some digging and believe investors may be worried about some underlying factors in the report.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Zhuzhou Smelter GroupLtd issued 17% more new shares over the last year. That means its earnings are split among a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of Zhuzhou Smelter GroupLtd's EPS by clicking here.

A Look At The Impact Of Zhuzhou Smelter GroupLtd's Dilution On Its Earnings Per Share (EPS)

Zhuzhou Smelter GroupLtd has improved its profit over the last three years, with an annualized gain of 261% in that time. But EPS was only up 63% per year, in the exact same period. And the 23% profit boost in the last year certainly seems impressive at first glance. But earnings per share are actually down 3.8%, over the last twelve months. And so, you can see quite clearly that dilution is influencing shareholder earnings.

If Zhuzhou Smelter GroupLtd's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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.

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.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that Zhuzhou Smelter GroupLtd's profit was boosted by unusual items worth CN¥70m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Zhuzhou Smelter GroupLtd's Profit Performance

To sum it all up, Zhuzhou Smelter GroupLtd 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 the reasons mentioned above, we think that a perfunctory glance at Zhuzhou Smelter GroupLtd's statutory profits might make it look better than it really is on an underlying level. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Case in point: We've spotted 2 warning signs for Zhuzhou Smelter GroupLtd you should be aware of.

Our examination of Zhuzhou Smelter GroupLtd 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 is always more to discover if you are capable of focussing your mind on minutiae. 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.