Shanghai Smith Adhesive New MaterialLtd's (SHSE:603683) Earnings Are Weaker Than They Seem

Unsurprisingly, Shanghai Smith Adhesive New Material Co.,Ltd's (SHSE:603683) stock price was strong on the back of its healthy earnings report. However, our analysis suggests that shareholders may be missing some factors that indicate the earnings result was not as good as it looked.

Check out our latest analysis for Shanghai Smith Adhesive New MaterialLtd

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Shanghai Smith Adhesive New MaterialLtd expanded the number of shares on issue by 18% over the last year. As a result, its net income is now split between 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 Smith Adhesive New MaterialLtd's historical EPS growth by clicking on this link.

How Is Dilution Impacting Shanghai Smith Adhesive New MaterialLtd's Earnings Per Share (EPS)?

Unfortunately, Shanghai Smith Adhesive New MaterialLtd's profit is down 59% per year over 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. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. 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

Each Shanghai Smith Adhesive New MaterialLtd 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 Shanghai Smith Adhesive New MaterialLtd's statutory profits are better than its underlying earnings power. The silver lining is that its EPS growth over the last year has been really wonderful, even if it's not a perfect measure. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Every company has risks, and we've spotted 1 warning sign for Shanghai Smith Adhesive New MaterialLtd you should know about.

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 is always more to discover if you are capable of focussing your mind on minutiae. 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.