Huasheng International Holding Limited's (HKG:1323) healthy profit numbers didn't contain any surprises for investors. However the statutory profit number doesn't tell the whole story, and we have found some factors which might be of concern to shareholders.

Check out our latest analysis for Huasheng International Holding

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Huasheng International Holding expanded the number of shares on issue by 20% 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 Huasheng International Holding's historical EPS growth by clicking on this link.

A Look At The Impact Of Huasheng International Holding's Dilution on Its Earnings Per Share (EPS).

Huasheng International Holding was losing money three years ago. And even focusing only on the last twelve months, we don't have a meaningful growth rate because it made a loss a year ago, too. What we do know is that while it's great to see a profit over the last twelve months, that profit would have been better, on a per share basis, if the company hadn't needed to issue shares. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, if Huasheng International Holding'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 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 Huasheng International Holding.

Operating Revenue Or Not?

Companies will classify their revenue streams as either operating revenue or other revenue. Oftentimes, non-operating revenue spikes are not repeated, so it makes sense to be cautious where non-operating revenue has made a very large contribution to total profit. However, we note that when non-operating revenue increases suddenly, it will sometimes generate an unsustainable boost to profit. Alongside the dilution mentioned above, we think shareholders should note that Huasheng International Holding had a significant increase in non-operating revenue as a proportion of total revenue over the last year. Indeed, this proportion rose from 100% last year to 106% this year. If that non-operating revenue fails to manifest in the current year, then there's a real risk the bottom line profit result will be impacted negatively. Sometimes, you can get a better idea of the underlying earnings potential of a company by excluding unusual boosts to non-operating revenue.

Our Take On Huasheng International Holding's Profit Performance

In its last report Huasheng International Holding benefitted from a spike in non-operating revenue which may make its top line look unsustainably good, and even flow down to its profit. 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 Huasheng International Holding's profits probably give an overly generous impression of its sustainable level of profitability. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Case in point: We've spotted 3 warning signs for Huasheng International Holding you should be aware of.

Our examination of Huasheng International Holding 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. 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.