Shanghai Trendzone Holdings GroupLtd's (SHSE:603030) Profits Appear To Have Quality Issues

The market shrugged off Shanghai Trendzone Holdings Group Co.,Ltd's (SHSE:603030) solid earnings report. We think that investors might be worried about some concerning underlying factors.

View our latest analysis for Shanghai Trendzone Holdings GroupLtd

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Shanghai Trendzone Holdings GroupLtd expanded the number of shares on issue by 132% 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. You can see a chart of Shanghai Trendzone Holdings GroupLtd's EPS by clicking here.

How Is Dilution Impacting Shanghai Trendzone Holdings GroupLtd's Earnings Per Share (EPS)?

Unfortunately, we don't have any visibility into its profits three years back, because we lack the data. And even focusing only on the last twelve months, we don't have a meaningful growth rate because it made a loss a year ago, too. But mathematics aside, it is always good to see when a formerly unprofitable business come good (though we accept profit would have been higher if dilution had not been required). And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

If Shanghai Trendzone Holdings GroupLtd'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 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 Trendzone Holdings GroupLtd.

The Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that Shanghai Trendzone Holdings GroupLtd's profit suffered from unusual items, which reduced profit by CN¥71m in the last twelve months. 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 that's hardly a surprise given these line items are considered unusual. If Shanghai Trendzone Holdings GroupLtd doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Shanghai Trendzone Holdings GroupLtd's Profit Performance

To sum it all up, Shanghai Trendzone Holdings GroupLtd took a hit from unusual items which pushed its profit down; without that, it would have made more money. 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. Based on these factors, we think it's very unlikely that Shanghai Trendzone Holdings GroupLtd's statutory profits make it seem much weaker than it is. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. When we did our research, we found 2 warning signs for Shanghai Trendzone Holdings GroupLtd (1 can't be ignored!) that we believe deserve your full attention.

Our examination of Shanghai Trendzone Holdings GroupLtd has focussed on certain factors that can make its earnings look better than they are. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.