AVIC Airborne Systems Co., Ltd.'s (SHSE:600372) robust earnings report didn't manage to move the market for its stock. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. AVIC Airborne Systems expanded the number of shares on issue by 152% 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. You can see a chart of AVIC Airborne Systems' EPS by clicking here.
A Look At The Impact Of AVIC Airborne Systems' Dilution On Its Earnings Per Share (EPS)
AVIC Airborne Systems has improved its profit over the last three years, with an annualized gain of 199% in that time. But EPS was only up 25% per year, in the exact same period. And the 40% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 5.4% in that time. So you can see that the dilution has had a fairly significant impact on shareholders.
In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if AVIC Airborne Systems 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.
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 AVIC Airborne Systems' Profit Performance
AVIC Airborne Systems shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. For this reason, we think that AVIC Airborne Systems' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But at least holders can take some solace from the 25% per annum growth in EPS for the last three. 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. Our analysis shows 2 warning signs for AVIC Airborne Systems (1 is significant!) and we strongly recommend you look at them before investing.
This note has only looked at a single factor that sheds light on the nature of AVIC Airborne Systems' profit. 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.