The market was pleased with the recent earnings report from Hangzhou Jizhi Mechatronic Co., Ltd. (SZSE:300553), despite the profit numbers being soft. However, we think the company is showing some signs that things are more promising than they seem.

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One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Hangzhou Jizhi Mechatronic expanded the number of shares on issue by 5.0% 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 Hangzhou Jizhi Mechatronic's historical EPS growth by clicking on this link.

How Is Dilution Impacting Hangzhou Jizhi Mechatronic's Earnings Per Share (EPS)?

Hangzhou Jizhi Mechatronic has improved its profit over the last three years, with an annualized gain of 2.5% in that time. But on the other hand, earnings per share actually fell by 22% per year. Net profit actually dropped by 5.7% in the last year. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 11%. Therefore, the dilution is having a noteworthy influence on shareholder returns.

If Hangzhou Jizhi Mechatronic'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 Hangzhou Jizhi Mechatronic.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that Hangzhou Jizhi Mechatronic's profit suffered from unusual items, which reduced profit by CN¥13m in the last twelve months. 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, after all, that's exactly what the accounting terminology implies. Hangzhou Jizhi Mechatronic took a rather significant hit from unusual items in the year to March 2025. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

Our Take On Hangzhou Jizhi Mechatronic's Profit Performance

To sum it all up, Hangzhou Jizhi Mechatronic took a hit from unusual items which pushed its profit down; without that, it would have made more money. But unfortunately the dilution means that shareholders now own a smaller proportion of the company (assuming they maintained the same number of shares). That will weigh on earnings per share, even if it is not reflected in net income. Based on these factors, we think that Hangzhou Jizhi Mechatronic's profits are a reasonably conservative guide to its underlying profitability. So while earnings quality is important, it's equally important to consider the risks facing Hangzhou Jizhi Mechatronic at this point in time. Our analysis shows 2 warning signs for Hangzhou Jizhi Mechatronic (1 is a bit concerning!) and we strongly recommend you look at these before investing.

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 with significant insider holdings 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.