The market for Guizhou Space Appliance Co., LTD's (SZSE:002025) stock was strong after it released a healthy earnings report last week. While the profit numbers were good, our analysis has found some concerning factors that shareholders should be aware of.

See our latest analysis for Guizhou Space Appliance

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Guizhou Space Appliance expanded the number of shares on issue by 5.5% over the last year. Therefore, each share now receives a smaller portion of profit. 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. You can see a chart of Guizhou Space Appliance's EPS by clicking here.

A Look At The Impact Of Guizhou Space Appliance's Dilution on Its Earnings Per Share (EPS).

Guizhou Space Appliance has improved its profit over the last three years, with an annualized gain of 36% in that time. And in the last year the company managed to bump profit up by 12%. But in comparison, EPS only increased by 11% over the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, earnings per share growth should beget share price growth. So Guizhou Space Appliance 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 Guizhou Space Appliance's Profit Performance

Each Guizhou Space Appliance share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Because of this, we think that it may be that Guizhou Space Appliance's statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 33% 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. If you want to do dive deeper into Guizhou Space Appliance, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 1 warning sign with Guizhou Space Appliance, and understanding it should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Guizhou Space Appliance's profit. 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.