Shanghai Smith Adhesive New Material Co.,Ltd's (SHSE:603683) stock was strong after they recently reported robust earnings. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, Shanghai Smith Adhesive New MaterialLtd increased the number of shares on issue by 18% 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 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 Shanghai Smith Adhesive New MaterialLtd's historical EPS growth by clicking on this link.

A Look At The Impact Of Shanghai Smith Adhesive New MaterialLtd's Dilution On Its Earnings Per Share (EPS)

Shanghai Smith Adhesive New MaterialLtd's net profit dropped by 59% per year over the last three years. The good news is that profit was up 408% in the last twelve months. On the other hand, earnings per share are only up 318% over the same period. 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 Shanghai Smith Adhesive New MaterialLtd can grow EPS persistently. 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shanghai Smith Adhesive New MaterialLtd.

Our Take On Shanghai Smith Adhesive New MaterialLtd's Profit Performance

Shanghai Smith Adhesive New MaterialLtd shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Therefore, it seems possible to us that Shanghai Smith Adhesive New MaterialLtd's true underlying earnings power is actually less than its statutory profit. But the happy news is that, while acknowledging we have to look beyond the statutory numbers, those numbers are still improving, with EPS growing at a very high rate over the last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. At Simply Wall St, we found 1 warning sign for Shanghai Smith Adhesive New MaterialLtd and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of Shanghai Smith Adhesive New MaterialLtd's profit. But there are plenty of other ways to inform your opinion of a company. 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.