The market rallied behind Jiangsu Yangdian Science & Technology Co. Ltd.'s (SZSE:301012) stock, leading do a rise in the share price after its recent weak earnings report. While shareholders may be willing to overlook soft profit numbers, we believe that they should also be taking into account some other factors which may be cause for concern.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Jiangsu Yangdian Science & Technology issued 20% more new shares over the last year. As a result, its net income is now split between a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out Jiangsu Yangdian Science & Technology's historical EPS growth by clicking on this link.

A Look At The Impact Of Jiangsu Yangdian Science & Technology's Dilution On Its Earnings Per Share (EPS)

Jiangsu Yangdian Science & Technology's net profit dropped by 63% per year over the last three years. And even focusing only on the last twelve months, we see profit is down 55%. Sadly, earnings per share fell further, down a full 61% in that time. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, if Jiangsu Yangdian Science & Technology'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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Jiangsu Yangdian Science & Technology.

How Do Unusual Items Influence Profit?

Finally, we should also consider the fact that unusual items boosted Jiangsu Yangdian Science & Technology's net profit by CN¥1.4m 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. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Jiangsu Yangdian Science & Technology's Profit Performance

To sum it all up, Jiangsu Yangdian Science & Technology got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. And furthermore, it went and issued plenty of new shares, ensuring that each shareholder (who did not tip more money in) now owns a smaller proportion of the company. Considering all this we'd argue Jiangsu Yangdian Science & Technology's 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 Jiangsu Yangdian Science & Technology at this point in time. Be aware that Jiangsu Yangdian Science & Technology is showing 4 warning signs in our investment analysis and 2 of those are a bit unpleasant...

Our examination of Jiangsu Yangdian Science & Technology 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 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. 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.