Stock Analysis

Shanghai Pret Composites' (SZSE:002324) Earnings Are Weaker Than They Seem

Source: Shutterstock

Last week's profit announcement from Shanghai Pret Composites Co., Ltd. (SZSE:002324) was underwhelming for investors, despite headline numbers being robust. We did some digging and found some worrying underlying problems.

View our latest analysis for Shanghai Pret Composites

SZSE:002324 Earnings and Revenue History April 25th 2024

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, Shanghai Pret Composites increased the number of shares on issue by 9.0% over the last twelve months by issuing new shares. That means its earnings are split among a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out Shanghai Pret Composites' historical EPS growth by clicking on this link.

How Is Dilution Impacting Shanghai Pret Composites' Earnings Per Share (EPS)?

Shanghai Pret Composites has improved its profit over the last three years, with an annualized gain of 18% in that time. And at a glance the 133% gain in profit over the last year impresses. On the other hand, earnings per share are only up 124% in that time. And so, you can see quite clearly that dilution is influencing shareholder earnings.

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 Pret Composites 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.

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 Shanghai Pret Composites' Profit Performance

Each Shanghai Pret Composites share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Therefore, it seems possible to us that Shanghai Pret Composites' true underlying earnings power is actually less than its statutory profit. But the happy news is that, while acknowledging we have to look beyond the statutory numbers, those numbers are still improving, with EPS growing at a very high rate over 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 Shanghai Pret Composites at this point in time. Case in point: We've spotted 2 warning signs for Shanghai Pret Composites you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Shanghai Pret Composites' profit. But there are plenty of other ways to inform your opinion of a company. 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. 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.

New: Manage All Your Stock Portfolios in One Place

We've created the ultimate portfolio companion for stock investors, and it's free.

• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks

Try a Demo Portfolio for Free

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

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.