We Think You Can Look Beyond Shanghai Supezet Engineering Technology's (SHSE:688121) Lackluster Earnings

The market for Shanghai Supezet Engineering Technology Corp., Ltd.'s (SHSE:688121) shares didn't move much after it posted weak earnings recently. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

View our latest analysis for Shanghai Supezet Engineering Technology

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Shanghai Supezet Engineering Technology expanded the number of shares on issue by 13% 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. Check out Shanghai Supezet Engineering Technology's historical EPS growth by clicking on this link.

A Look At The Impact Of Shanghai Supezet Engineering Technology's Dilution On Its Earnings Per Share (EPS)

Unfortunately, Shanghai Supezet Engineering Technology's profit is down 33% per year over three years. Even looking at the last year, profit was still down 28%. Sadly, earnings per share fell further, down a full 32% in that time. So you can see that the dilution has had a bit of an impact on shareholders.

If Shanghai Supezet Engineering Technology's 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 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 Shanghai Supezet Engineering Technology.

How Do Unusual Items Influence Profit?

On top of the dilution, we should also consider the CN¥61m impact of unusual items in the last year, which had the effect of suppressing profit. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. 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. Assuming those unusual expenses don't come up again, we'd therefore expect Shanghai Supezet Engineering Technology to produce a higher profit next year, all else being equal.

Our Take On Shanghai Supezet Engineering Technology's Profit Performance

Shanghai Supezet Engineering Technology suffered from unusual items which depressed its profit in its last report; if that is not repeated then profit should be higher, all else being equal. But on the other hand, the company issued more shares, so without buying more shares each shareholder will end up with a smaller part of the profit. Given the contrasting considerations, we don't have a strong view as to whether Shanghai Supezet Engineering Technology's profits are an apt reflection of its underlying potential for profit. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Be aware that Shanghai Supezet Engineering Technology is showing 4 warning signs in our investment analysis and 1 of those is concerning...

Our examination of Shanghai Supezet Engineering Technology has focussed on certain factors that can make its earnings look better than they are. 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 with significant insider holdings 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.