Shenzhen Prince New MaterialsLtd (SZSE:002735) Posted Healthy Earnings But There Are Some Other Factors To Be Aware Of

Despite posting some strong earnings, the market for Shenzhen Prince New Materials Co.,Ltd.'s (SZSE:002735) stock hasn't moved much. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

See our latest analysis for Shenzhen Prince New MaterialsLtd

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Shenzhen Prince New MaterialsLtd issued 27% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. 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 Shenzhen Prince New MaterialsLtd's historical EPS growth by clicking on this link.

How Is Dilution Impacting Shenzhen Prince New MaterialsLtd's Earnings Per Share (EPS)?

Shenzhen Prince New MaterialsLtd's net profit dropped by 39% per year over the last three years. The good news is that profit was up 82% in the last twelve months. But earnings per share are actually down 2.6%, over that same period. This is a great example of why it's rather imprudent to rely only on net income as a growth measure. So you can see that the dilution has had a fairly significant impact on shareholders.

In the long term, if Shenzhen Prince New MaterialsLtd'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 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.

How Do Unusual Items Influence Profit?

Finally, we should also consider the fact that unusual items boosted Shenzhen Prince New MaterialsLtd's net profit by CN¥7.5m over the last year. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Shenzhen Prince New MaterialsLtd's Profit Performance

To sum it all up, Shenzhen Prince New MaterialsLtd got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. And furthermore, it went and issued plenty of new shares, ensuring that each shareholder (who did not tip more money in) now owns a smaller proportion of the company. Considering all this we'd argue Shenzhen Prince New MaterialsLtd's profits probably give an overly generous impression of its sustainable level of profitability. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Case in point: We've spotted 1 warning sign for Shenzhen Prince New MaterialsLtd you should be aware of.

Our examination of Shenzhen Prince New MaterialsLtd has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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 with high insider ownership.

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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.