The recent earnings release from Wuxi Chipown Micro-electronics limited (SHSE:688508 ) was disappointing to investors. We think that they may have more to worry about than just soft profit numbers.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Wuxi Chipown Micro-electronics increased the number of shares on issue by 13% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. 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 Wuxi Chipown Micro-electronics' historical EPS growth by clicking on this link.

A Look At The Impact Of Wuxi Chipown Micro-electronics' Dilution On Its Earnings Per Share (EPS)

Unfortunately, Wuxi Chipown Micro-electronics' profit is down 40% per year over three years. Even looking at the last year, profit was still down 34%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 37% in the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, if Wuxi Chipown Micro-electronics' 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 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.

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.

How Do Unusual Items Influence Profit?

Finally, we should also consider the fact that unusual items boosted Wuxi Chipown Micro-electronics' net profit by CN¥17m 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, after all, that's exactly what the accounting terminology implies. We can see that Wuxi Chipown Micro-electronics' positive unusual items were quite significant relative to its profit in the year to December 2023. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Wuxi Chipown Micro-electronics' Profit Performance

In its last report Wuxi Chipown Micro-electronics benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. 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 Wuxi Chipown Micro-electronics' profits probably give an overly generous impression of its sustainable level of profitability. So while earnings quality is important, it's equally important to consider the risks facing Wuxi Chipown Micro-electronics at this point in time. Every company has risks, and we've spotted 3 warning signs for Wuxi Chipown Micro-electronics you should know about.

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. 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.