Guangdong Biolight Meditech Co., Ltd.'s (SZSE:300246) stock rose after its recent weak earnings report. While shareholders may be willing to overlook soft profit numbers, we believe that they should also be taking into account some other factors which may be cause for concern.

See our latest analysis for Guangdong Biolight Meditech

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Guangdong Biolight Meditech issued 20% more new shares over the last year. That means its earnings are split among a greater number of shares. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. Check out Guangdong Biolight Meditech's historical EPS growth by clicking on this link.

How Is Dilution Impacting Guangdong Biolight Meditech's Earnings Per Share? (EPS)

Guangdong Biolight Meditech's net profit dropped by 14% per year over the last three years. Even looking at the last year, profit was still down 84%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 84% in the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, if Guangdong Biolight Meditech's 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Guangdong Biolight Meditech.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted Guangdong Biolight Meditech's net profit by CN¥16m over the last year. 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. Which is hardly surprising, given the name. We can see that Guangdong Biolight Meditech's positive unusual items were quite significant relative to its profit in the year to March 2022. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Guangdong Biolight Meditech's Profit Performance

In its last report Guangdong Biolight Meditech 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. Considering all this we'd argue Guangdong Biolight Meditech's profits probably give an overly generous impression of its sustainable level of profitability. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. You'd be interested to know, that we found 5 warning signs for Guangdong Biolight Meditech and you'll want to know about them.

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. 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.