Despite Longfor Group Holdings Limited's (HKG:960) 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.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Longfor Group Holdings expanded the number of shares on issue by 6.7% 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 Longfor Group Holdings' EPS by clicking here.

A Look At The Impact Of Longfor Group Holdings' Dilution On Its Earnings Per Share (EPS)

Longfor Group Holdings' net profit dropped by 36% per year over the last three years. Even looking at the last year, profit was still down 47%. Sadly, earnings per share fell further, down a full 49% in that time. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, if Longfor Group Holdings' 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.

Our data indicates that Longfor Group Holdings insiders have been buying shares! Luckily we are in a position to provide you with this free chart of of all insider buying (and selling).

How Do Unusual Items Influence Profit?

Finally, we should also consider the fact that unusual items boosted Longfor Group Holdings' net profit by CN¥3.1b over the last year. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. If Longfor Group Holdings doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Longfor Group Holdings' Profit Performance

In its last report Longfor Group Holdings benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. 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 Longfor Group Holdings' profits probably give an overly generous impression of its sustainable level of profitability. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Every company has risks, and we've spotted 3 warning signs for Longfor Group Holdings (of which 1 shouldn't be ignored!) you should know about.

Our examination of Longfor Group Holdings 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 is always more to discover if you are capable of focussing your mind on minutiae. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. 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.