The market shrugged off Yuexiu Property Company Limited's (HKG:123) weak earnings report last week. Our analysis suggests that there are some positive factors lying below the troubling profit numbers which investors are finding comfort in.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Yuexiu Property increased the number of shares on issue by 30% over the last twelve months by issuing new shares. 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 Yuexiu Property's historical EPS growth by clicking on this link.

How Is Dilution Impacting Yuexiu Property's Earnings Per Share (EPS)?

Yuexiu Property's net profit dropped by 25% per year over the last three years. And even focusing only on the last twelve months, we see profit is down 19%. 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 having a rather significant impact on shareholders.

In the long term, if Yuexiu Property's earnings per share can increase, then the share price should too. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. 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.

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.

How Do Unusual Items Influence Profit?

On top of the dilution, we should also consider the CN¥1.5b impact of unusual items in the last year, which had the effect of suppressing profit. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Yuexiu Property to produce a higher profit next year, all else being equal.

Our Take On Yuexiu Property's Profit Performance

Yuexiu Property suffered from unusual items which depressed its profit in its last report; if that is not repeated then profit should be higher, all else being equal. But on the other hand, the company issued more shares, so without buying more shares each shareholder will end up with a smaller part of the profit. Having considered these factors, we don't think Yuexiu Property's statutory profits give an overly harsh view of the business. If you want to do dive deeper into Yuexiu Property, you'd also look into what risks it is currently facing. To that end, you should learn about the 3 warning signs we've spotted with Yuexiu Property (including 1 which is a bit unpleasant).

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. 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.