Despite Hua Hong Semiconductor Limited's (HKG:1347) recent earnings report having lackluster headline numbers, the market responded positively. We think that shareholders might be missing some concerning factors that our analysis found.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Hua Hong Semiconductor expanded the number of shares on issue by 31% over the last year. As a result, its net income is now split between 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 Hua Hong Semiconductor's historical EPS growth by clicking on this link.

How Is Dilution Impacting Hua Hong Semiconductor's Earnings Per Share (EPS)?

Hua Hong Semiconductor has improved its profit over the last three years, with an annualized gain of 182% in that time. In comparison, earnings per share only gained 146% over the same period. Net income was down 38% over the last twelve months. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 45%. So you can see that the dilution has had a fairly significant impact on shareholders.

In the long term, if Hua Hong Semiconductor'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 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.

Our Take On Hua Hong Semiconductor's Profit Performance

Hua Hong Semiconductor issued shares during the year, and that means its EPS performance lags its net income growth. Therefore, it seems possible to us that Hua Hong Semiconductor's true underlying earnings power is actually less than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example - Hua Hong Semiconductor has 2 warning signs we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Hua Hong Semiconductor's profit. 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.