China Merchants Expressway Network & Technology Holdings Co.,Ltd. (SZSE:001965) announced strong profits, but the stock was stagnant. 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. In fact, China Merchants Expressway Network & Technology HoldingsLtd increased the number of shares on issue by 10% over the last twelve months by issuing new shares. 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 China Merchants Expressway Network & Technology HoldingsLtd's historical EPS growth by clicking on this link.
How Is Dilution Impacting China Merchants Expressway Network & Technology HoldingsLtd's Earnings Per Share (EPS)?
As you can see above, China Merchants Expressway Network & Technology HoldingsLtd has been growing its net income over the last few years, with an annualized gain of 204% over three years. And the 39% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 40% in that time. And so, you can see quite clearly that dilution is influencing shareholder earnings.
Changes in the share price do tend to reflect changes in earnings per share, in the long run. So China Merchants Expressway Network & Technology HoldingsLtd shareholders will want to see that EPS figure continue to increase. 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 China Merchants Expressway Network & Technology HoldingsLtd's Profit Performance
Each China Merchants Expressway Network & Technology HoldingsLtd share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Because of this, we think that it may be that China Merchants Expressway Network & Technology HoldingsLtd's statutory profits are better than its underlying earnings power. But the good news is that its EPS growth over the last three years has been very impressive. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Every company has risks, and we've spotted 3 warning signs for China Merchants Expressway Network & Technology HoldingsLtd (of which 1 is potentially serious!) you should know about.
This note has only looked at a single factor that sheds light on the nature of China Merchants Expressway Network & Technology HoldingsLtd's 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.