Shenzhen Prince New MaterialsLtd's (SZSE:002735) Solid Profits Have Weak Fundamentals

Unsurprisingly, Shenzhen Prince New Materials Co.,Ltd.'s (SZSE:002735) stock price was strong on the back of its healthy earnings report. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.

Check out our latest analysis for Shenzhen Prince New MaterialsLtd

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Shenzhen Prince New MaterialsLtd increased the number of shares on issue by 27% 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 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)?

Unfortunately, Shenzhen Prince New MaterialsLtd's profit is down 30% per year over three years. On the bright side, in the last twelve months it grew profit by 110%. But EPS was less impressive, up only 89% in that time. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So Shenzhen Prince New MaterialsLtd shareholders will want to see that EPS figure continue to increase. 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shenzhen Prince New MaterialsLtd.

Our Take On Shenzhen Prince New MaterialsLtd's Profit Performance

Shenzhen Prince New MaterialsLtd shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Because of this, we think that it may be that Shenzhen Prince New MaterialsLtd's statutory profits are better than its underlying earnings power. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Case in point: We've spotted 3 warning signs for Shenzhen Prince New MaterialsLtd you should be mindful of and 2 of these bad boys don't sit too well with us.

This note has only looked at a single factor that sheds light on the nature of Shenzhen Prince New MaterialsLtd'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. 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.