The market shrugged off the recent earnings report from NanJing AoLian AE&EA Co.,Ltd (SZSE:300585), despite the profit numbers being soft. Our analysis suggests that investors may have noticed some promising signs beyond the statutory profit figures.

See our latest analysis for NanJing AoLian AE&EALtd

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, NanJing AoLian AE&EALtd issued 6.9% 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. Check out NanJing AoLian AE&EALtd's historical EPS growth by clicking on this link.

How Is Dilution Impacting NanJing AoLian AE&EALtd's Earnings Per Share? (EPS)

Unfortunately, NanJing AoLian AE&EALtd's profit is down 34% per year over three years. And even focusing only on the last twelve months, we see profit is down 46%. Sadly, earnings per share fell further, down a full 48% in that time. And so, you can see quite clearly that dilution is influencing shareholder earnings.

If NanJing AoLian AE&EALtd'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 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 NanJing AoLian AE&EALtd.

How Do Unusual Items Influence Profit?

On top of the dilution, we should also consider the CN¥23m impact of unusual items in the last year, which had the effect of suppressing profit. 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 that's hardly a surprise given these line items are considered unusual. In the twelve months to March 2022, NanJing AoLian AE&EALtd had a big unusual items expense. As a result, we can surmise that the unusual items made its statutory profit significantly weaker than it would otherwise be.

Our Take On NanJing AoLian AE&EALtd's Profit Performance

NanJing AoLian AE&EALtd 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 on the other hand, the company issued more shares, so without buying more shares each shareholder will end up with a smaller part of the profit. Based on these factors, we think that NanJing AoLian AE&EALtd's profits are a reasonably conservative guide to its underlying profitability. If you'd like to know more about NanJing AoLian AE&EALtd as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 5 warning signs for NanJing AoLian AE&EALtd (of which 1 doesn't sit too well with us!) you should know about.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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. 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.