Changsha DIALINE New Material Sci.&Tech's (SZSE:300700) Solid Earnings May Rest On Weak Foundations

Following the solid earnings report from Changsha DIALINE New Material Sci.&Tech. Co., Ltd. (SZSE:300700), the market responded by bidding up the stock price. While the profit numbers were good, our analysis has found some concerning factors that shareholders should be aware of.

Check out our latest analysis for Changsha DIALINE New Material Sci.&Tech

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, Changsha DIALINE New Material Sci.&Tech increased the number of shares on issue by 24% 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. You can see a chart of Changsha DIALINE New Material Sci.&Tech's EPS by clicking here.

A Look At The Impact Of Changsha DIALINE New Material Sci.&Tech's Dilution On Its Earnings Per Share (EPS)

We don't have any data on the company's profits from three years ago. The good news is that profit was up 25% in the last twelve months. But EPS was less impressive, up only 11% in that time. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Changsha DIALINE New Material Sci.&Tech 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 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.

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.

Our Take On Changsha DIALINE New Material Sci.&Tech's Profit Performance

Each Changsha DIALINE New Material Sci.&Tech share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Because of this, we think that it may be that Changsha DIALINE New Material Sci.&Tech's statutory profits are better than its underlying earnings power. The good news is that, its earnings per share increased by 11% in 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. If you'd like to know more about Changsha DIALINE New Material Sci.&Tech as a business, it's important to be aware of any risks it's facing. While conducting our analysis, we found that Changsha DIALINE New Material Sci.&Tech has 2 warning signs and it would be unwise to ignore them.

This note has only looked at a single factor that sheds light on the nature of Changsha DIALINE New Material Sci.&Tech'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.