Zoomlion Heavy Industry Science and Technology’s (SZSE:000157) Earnings Are Of Questionable Quality

Zoomlion Heavy Industry Science and Technology Co., Ltd. (SZSE:000157) just reported some strong earnings, and the market reacted accordingly with a healthy uplift in the share price. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.

View our latest analysis for Zoomlion Heavy Industry Science and Technology

To understand the value of a company’s earnings growth, it is imperative to consider any dilution of shareholders’ interests. Zoomlion Heavy Industry Science and Technology expanded the number of shares on issue by 5.1% over the last year. Therefore, each share now receives a smaller portion of profit. 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 Zoomlion Heavy Industry Science and Technology’s historical EPS growth by clicking on this link.

A Look At The Impact Of Zoomlion Heavy Industry Science and Technology’s Dilution On Its Earnings Per Share (EPS)

Zoomlion Heavy Industry Science and Technology’s net profit dropped by 52% per year over the last three years. The good news is that profit was up 52% in the last twelve months. But EPS was less impressive, up only 59% in that time. So you can see that the dilution has had a bit of an impact on shareholders.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if Zoomlion Heavy Industry Science and Technology can grow EPS persistently. 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?

Alongside that dilution, it’s also important to note that Zoomlion Heavy Industry Science and Technology’s profit was boosted by unusual items worth CN¥1.0b in the last twelve months. We can’t deny that higher profits generally leave us optimistic, but we’d prefer it if the profit were to be sustainable. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And, after all, that’s exactly what the accounting terminology implies. Zoomlion Heavy Industry Science and Technology had a rather significant contribution from unusual items relative to its profit 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 Zoomlion Heavy Industry Science and Technology’s Profit Performance

To sum it all up, Zoomlion Heavy Industry Science and Technology got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. On top of that, the dilution means that its earnings per share performance is worse than its profit performance. For the reasons mentioned above, we think that a perfunctory glance at Zoomlion Heavy Industry Science and Technology’s statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into Zoomlion Heavy Industry Science and Technology, you’d also look into what risks it is currently facing. For example – Zoomlion Heavy Industry Science and Technology has 3 warning signs we think you should be aware of.

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.