A lackluster earnings announcement from Shandong Xinhua Pharmaceutical Company Limited (HKG:719) last week didn't sink the stock price. We think that investors are worried about some weaknesses underlying the earnings.

View our latest analysis for Shandong Xinhua Pharmaceutical

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, Shandong Xinhua Pharmaceutical increased the number of shares on issue by 6.7% over the last twelve months by issuing new shares. 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 Shandong Xinhua Pharmaceutical's historical EPS growth by clicking on this link.

How Is Dilution Impacting Shandong Xinhua Pharmaceutical's Earnings Per Share (EPS)?

Shandong Xinhua Pharmaceutical has improved its profit over the last three years, with an annualized gain of 22% in that time. Net income was down 2.8% over the last twelve months. But the EPS result was even worth, with the company recording a decline of 4.8%. Therefore, the dilution is having a noteworthy influence on shareholder returns.

If Shandong Xinhua Pharmaceutical'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 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shandong Xinhua Pharmaceutical.

Our Take On Shandong Xinhua Pharmaceutical's Profit Performance

Over the last year Shandong Xinhua Pharmaceutical issued new shares and so, there's a noteworthy divergence between EPS and net income growth. Because of this, we think that it may be that Shandong Xinhua Pharmaceutical's statutory profits are better than its underlying earnings power. Nonetheless, it's still worth noting that its earnings per share have grown at 19% over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing Shandong Xinhua Pharmaceutical at this point in time. In terms of investment risks, we've identified 2 warning signs with Shandong Xinhua Pharmaceutical, and understanding them should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Shandong Xinhua Pharmaceutical's profit. 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.