Investors Shouldn't Be Too Comfortable With Poly Plastic Masterbatch (SuZhou)Ltd's (SZSE:300905) Earnings

Despite posting some strong earnings, the market for Poly Plastic Masterbatch (SuZhou) Co.,Ltd's (SZSE:300905) stock hasn't moved much. Our analysis suggests that shareholders have noticed something concerning in the numbers.

See our latest analysis for Poly Plastic Masterbatch (SuZhou)Ltd

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Poly Plastic Masterbatch (SuZhou)Ltd expanded the number of shares on issue by 22% over the last year. 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 Poly Plastic Masterbatch (SuZhou)Ltd's EPS by clicking here.

How Is Dilution Impacting Poly Plastic Masterbatch (SuZhou)Ltd's Earnings Per Share (EPS)?

Unfortunately, Poly Plastic Masterbatch (SuZhou)Ltd's profit is down 4.7% per year over three years. On the bright side, in the last twelve months it grew profit by 111%. On the other hand, earnings per share are only up 87% over the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

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 Poly Plastic Masterbatch (SuZhou)Ltd 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 Poly Plastic Masterbatch (SuZhou)Ltd.

How Do Unusual Items Influence Profit?

Finally, we should also consider the fact that unusual items boosted Poly Plastic Masterbatch (SuZhou)Ltd's net profit by CN¥17m over the last year. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. 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 Poly Plastic Masterbatch (SuZhou)Ltd's Profit Performance

In its last report Poly Plastic Masterbatch (SuZhou)Ltd benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. 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 Poly Plastic Masterbatch (SuZhou)Ltd'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. To that end, you should learn about the 3 warning signs we've spotted with Poly Plastic Masterbatch (SuZhou)Ltd (including 1 which is a bit concerning).

Our examination of Poly Plastic Masterbatch (SuZhou)Ltd 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 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. 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.