Despite Shanghai Pharmaceuticals Holding Co., Ltd's (SHSE:601607) recent earnings report having lackluster headline numbers, the market responded positively. 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.

View our latest analysis for Shanghai Pharmaceuticals Holding

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Shanghai Pharmaceuticals Holding issued 30% more new shares over the last year. As a result, its net income is now split between 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 Shanghai Pharmaceuticals Holding's EPS by clicking here.

A Look At The Impact Of Shanghai Pharmaceuticals Holding's Dilution On Its Earnings Per Share (EPS)

As you can see above, Shanghai Pharmaceuticals Holding has been growing its net income over the last few years, with an annualized gain of 26% over three years. Net income was down 7.1% over the last twelve months. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 14%. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

If Shanghai Pharmaceuticals Holding's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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.

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.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted Shanghai Pharmaceuticals Holding's net profit by CN¥1.6b over the last year. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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 Shanghai Pharmaceuticals Holding 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 Shanghai Pharmaceuticals Holding's Profit Performance

To sum it all up, Shanghai Pharmaceuticals Holding 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. For the reasons mentioned above, we think that a perfunctory glance at Shanghai Pharmaceuticals Holding's statutory profits might make it look better than it really is on an underlying level. If you'd like to know more about Shanghai Pharmaceuticals Holding as a business, it's important to be aware of any risks it's facing. For example, we've discovered 3 warning signs that you should run your eye over to get a better picture of Shanghai Pharmaceuticals Holding.

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 is always more to discover if you are capable of focussing your mind on minutiae. 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.