Investors Shouldn't Be Too Comfortable With Shenzhen Farben Information TechnologyLtd's (SZSE:300925) Earnings

Last week's profit announcement from Shenzhen Farben Information Technology Co.,Ltd. (SZSE:300925) was underwhelming for investors, despite headline numbers being robust. We did some digging and found some worrying underlying problems.

See our latest analysis for Shenzhen Farben Information TechnologyLtd

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Shenzhen Farben Information TechnologyLtd expanded the number of shares on issue by 13% 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 Farben Information TechnologyLtd's historical EPS growth by clicking on this link.

How Is Dilution Impacting Shenzhen Farben Information TechnologyLtd's Earnings Per Share (EPS)?

Shenzhen Farben Information TechnologyLtd has improved its profit over the last three years, with an annualized gain of 2.0% in that time. In contrast, earnings per share were actually down by 15% per year, in the exact same period. And at a glance the 28% gain in profit over the last year impresses. On the other hand, earnings per share are only up 11% 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 Shenzhen Farben Information TechnologyLtd shareholders will want to see that EPS figure continue to increase. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. 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 Farben Information TechnologyLtd.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted Shenzhen Farben Information TechnologyLtd's net profit by CN¥13m 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. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. If Shenzhen Farben Information TechnologyLtd doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Shenzhen Farben Information TechnologyLtd's Profit Performance

To sum it all up, Shenzhen Farben Information TechnologyLtd got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. On top of that, the dilution means that its earnings per share performance is worse than its profit performance. For the reasons mentioned above, we think that a perfunctory glance at Shenzhen Farben Information TechnologyLtd's statutory profits might make it look better than it really is on an underlying level. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example, we've found that Shenzhen Farben Information TechnologyLtd has 2 warning signs (1 doesn't sit too well with us!) that deserve your attention before going any further with your analysis.

Our examination of Shenzhen Farben Information TechnologyLtd 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. 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 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.