Shenzhen Prince New Materials Co.,Ltd. (SZSE:002735) 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.
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Shenzhen Prince New MaterialsLtd issued 27% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. 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 Shenzhen Prince New MaterialsLtd's historical EPS growth by clicking on this link.
How Is Dilution Impacting Shenzhen Prince New MaterialsLtd's Earnings Per Share (EPS)?
Unfortunately, Shenzhen Prince New MaterialsLtd's profit is down 30% per year over three years. The good news is that profit was up 110% in the last twelve months. But EPS was less impressive, up only 89% in that time. So you can see that the dilution has had a fairly significant impact on shareholders.
Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Shenzhen Prince New MaterialsLtd shareholders will want to see that EPS figure continue to increase. 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 Shenzhen Prince New MaterialsLtd.
Our Take On Shenzhen Prince New MaterialsLtd's Profit Performance
Shenzhen Prince New MaterialsLtd shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Because of this, we think that it may be that Shenzhen Prince New MaterialsLtd's statutory profits are better than its underlying earnings power. 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. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example, Shenzhen Prince New MaterialsLtd has 3 warning signs (and 2 which are potentially serious) we think you should know about.
This note has only looked at a single factor that sheds light on the nature of Shenzhen Prince New MaterialsLtd's profit. 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. 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.