Why XJ International Holdings' (HKG:1765) Healthy Earnings Aren’t As Good As They Seem

XJ International Holdings Co., Ltd. (HKG:1765) posted some decent earnings, but shareholders didn't react strongly. Our analysis suggests they may be concerned about some underlying details.

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One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, XJ International Holdings issued 5.5% more new shares over the last year. That means its earnings are split among a greater number of shares. 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. You can see a chart of XJ International Holdings' EPS by clicking here.

How Is Dilution Impacting XJ International Holdings' Earnings Per Share (EPS)?

As you can see above, XJ International Holdings has been growing its net income over the last few years, with an annualized gain of 57% over three years. However, net income was pretty flat over the last year with a miniscule increase. Earnings per share are pretty much flat, too over the last twelve months, but EPS growth came in below below net income growth. Therefore, the dilution is having a noteworthy influence on shareholder returns.

If XJ International Holdings' EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. 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.

How Do Unusual Items Influence Profit?

Finally, we should also consider the fact that unusual items boosted XJ International Holdings' net profit by CN¥962m 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. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. We can see that XJ International Holdings' positive unusual items were quite significant relative to its profit in the year to February 2026. 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 XJ International Holdings' Profit Performance

In its last report XJ International 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 XJ International 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 1 warning sign for XJ International Holdings you should know about.

Our examination of XJ International 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.