A lackluster earnings announcement from China Aerospace Times Electronics CO., LTD. (SHSE:600879) last week didn't sink the stock price. We think that investors are worried about some weaknesses underlying the earnings.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, China Aerospace Times Electronics increased the number of shares on issue by 21% over the last twelve months by issuing new shares. That means its earnings are split among a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out China Aerospace Times Electronics' historical EPS growth by clicking on this link.

How Is Dilution Impacting China Aerospace Times Electronics' Earnings Per Share (EPS)?

China Aerospace Times Electronics' net profit dropped by 15% per year over the last three years. Even looking at the last year, profit was still down 22%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 33% in the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, if China Aerospace Times Electronics' earnings per share can increase, then the share price should too. 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.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that China Aerospace Times Electronics' profit was boosted by unusual items worth CN¥77m in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. If China Aerospace Times Electronics 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 China Aerospace Times Electronics' Profit Performance

To sum it all up, China Aerospace Times Electronics got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. 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. For the reasons mentioned above, we think that a perfunctory glance at China Aerospace Times Electronics' 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 China Aerospace Times Electronics at this point in time. Every company has risks, and we've spotted 1 warning sign for China Aerospace Times Electronics you should know about.

Our examination of China Aerospace Times Electronics 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. Some people consider a high return on equity to be a good sign of a quality business. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.