Changgao Electric Group Co., Ltd.'s (SZSE:002452) healthy profit numbers didn't contain any surprises for investors. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

View our latest analysis for Changgao Electric Group

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Changgao Electric Group expanded the number of shares on issue by 16% 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 Changgao Electric Group's historical EPS growth by clicking on this link.

How Is Dilution Impacting Changgao Electric Group's Earnings Per Share? (EPS)

Three years ago, Changgao Electric Group lost money. On the bright side, in the last twelve months it grew profit by 14%. On the other hand, earnings per share are only up 3.1% over the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if Changgao Electric Group can grow EPS persistently. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. 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 Changgao Electric Group.

How Do Unusual Items Influence Profit?

Finally, we should also consider the fact that unusual items boosted Changgao Electric Group's net profit by CN¥24m over the last year. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And that's as you'd expect, given these boosts are described as 'unusual'. If Changgao Electric Group 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 Changgao Electric Group's Profit Performance

To sum it all up, Changgao Electric Group 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 Changgao Electric Group's statutory profits might make it look better than it really is on an underlying level. If you'd like to know more about Changgao Electric Group as a business, it's important to be aware of any risks it's facing. You'd be interested to know, that we found 3 warning signs for Changgao Electric Group and you'll want to know about these.

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.