The subdued market reaction suggests that Zhejiang Changhua Auto Parts Co., Ltd.'s (SHSE:605018) recent earnings didn't contain any surprises. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

Check out our latest analysis for Zhejiang Changhua Auto Parts

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Zhejiang Changhua Auto Parts expanded the number of shares on issue by 12% over the last year. Therefore, each share now receives a smaller portion of profit. 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 Zhejiang Changhua Auto Parts' EPS by clicking here.

How Is Dilution Impacting Zhejiang Changhua Auto Parts' Earnings Per Share? (EPS)

Zhejiang Changhua Auto Parts' net profit dropped by 26% per year over the last three years. And even focusing only on the last twelve months, we see profit is down 30%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 33% in the same period. And so, you can see quite clearly that dilution is influencing shareholder earnings.

If Zhejiang Changhua Auto Parts' EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Zhejiang Changhua Auto Parts.

How Do Unusual Items Influence Profit?

Finally, we should also consider the fact that unusual items boosted Zhejiang Changhua Auto Parts' net profit by CN¥9.7m over the last year. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. Which is hardly surprising, given the name. If Zhejiang Changhua Auto Parts doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Zhejiang Changhua Auto Parts' Profit Performance

In its last report Zhejiang Changhua Auto Parts benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. 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 Zhejiang Changhua Auto Parts' statutory profits might make it look better than it really is on an underlying level. So while earnings quality is important, it's equally important to consider the risks facing Zhejiang Changhua Auto Parts at this point in time. Be aware that Zhejiang Changhua Auto Parts is showing 5 warning signs in our investment analysis and 1 of those shouldn't be ignored...

Our examination of Zhejiang Changhua Auto Parts 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.