Even though Guangdong Huafeng New Energy Technology Co.,Ltd. (SZSE:002806) posted strong earnings recently, the stock hasn't reacted in a large way. We think that investors might be worried about the foundations the earnings are built on.

View our latest analysis for Guangdong Huafeng New Energy TechnologyLtd

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Guangdong Huafeng New Energy TechnologyLtd issued 6.7% 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 Guangdong Huafeng New Energy TechnologyLtd's EPS by clicking here.

A Look At The Impact Of Guangdong Huafeng New Energy TechnologyLtd's Dilution on Its Earnings Per Share (EPS).

Unfortunately, we don't have any visibility into its profits three years back, because we lack the data. Zooming in to the last year, we still can't talk about growth rates coherently, since it made a loss last year. But mathematics aside, it is always good to see when a formerly unprofitable business come good (though we accept profit would have been higher if dilution had not been required). Therefore, the dilution is having a noteworthy influence on shareholder returns.

If Guangdong Huafeng New Energy TechnologyLtd's 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 Guangdong Huafeng New Energy TechnologyLtd.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that Guangdong Huafeng New Energy TechnologyLtd's profit was boosted by unusual items worth CN¥31m in the last twelve months. 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 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. Guangdong Huafeng New Energy TechnologyLtd had a rather significant contribution from unusual items relative to its profit to March 2022. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Guangdong Huafeng New Energy TechnologyLtd's Profit Performance

In its last report Guangdong Huafeng New Energy TechnologyLtd benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. And furthermore, it went and issued plenty of new shares, ensuring that each shareholder (who did not tip more money in) now owns a smaller proportion of the company. Considering all this we'd argue Guangdong Huafeng New Energy TechnologyLtd's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into Guangdong Huafeng New Energy TechnologyLtd, you'd also look into what risks it is currently facing. Case in point: We've spotted 3 warning signs for Guangdong Huafeng New Energy TechnologyLtd you should be aware of.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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.