Zhejiang Great Shengda PackagingLtd's (SHSE:603687) Earnings Are Of Questionable Quality

Zhejiang Great Shengda Packaging Co.,Ltd. (SHSE:603687) announced strong profits, but the stock was stagnant. Our analysis suggests that shareholders have noticed something concerning in the numbers.

View our latest analysis for Zhejiang Great Shengda PackagingLtd

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Zhejiang Great Shengda PackagingLtd increased the number of shares on issue by 11% over the last twelve months by issuing new shares. That means its earnings are split among 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 Zhejiang Great Shengda PackagingLtd's EPS by clicking here.

How Is Dilution Impacting Zhejiang Great Shengda PackagingLtd's Earnings Per Share (EPS)?

Unfortunately, Zhejiang Great Shengda PackagingLtd's profit is down 54% per year over three years. The good news is that profit was up 3.7% in the last twelve months. But EPS was far less impressive, dropping 14% in that time. This is a great example of why it's rather imprudent to rely only on net income as a growth measure. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, if Zhejiang Great Shengda PackagingLtd's earnings per share can increase, then the share price should too. 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.

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 Zhejiang Great Shengda PackagingLtd's Profit Performance

Each Zhejiang Great Shengda PackagingLtd 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 Zhejiang Great Shengda PackagingLtd's statutory profits are better than its underlying earnings power. In further bad news, its earnings per share decreased in 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. So while earnings quality is important, it's equally important to consider the risks facing Zhejiang Great Shengda PackagingLtd at this point in time. For example, we've discovered 2 warning signs that you should run your eye over to get a better picture of Zhejiang Great Shengda PackagingLtd.

This note has only looked at a single factor that sheds light on the nature of Zhejiang Great Shengda PackagingLtd's profit. 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.