Shenzhen Kinwong Electronic's (SHSE:603228) Solid Earnings May Rest On Weak Foundations

Following the solid earnings report from Shenzhen Kinwong Electronic Co., Ltd. (SHSE:603228), the market responded by bidding up the stock price. While the profit numbers were good, our analysis has found some concerning factors that shareholders should be aware of.

Check out our latest analysis for Shenzhen Kinwong Electronic

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Shenzhen Kinwong Electronic issued 11% 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 Kinwong Electronic's historical EPS growth by clicking on this link.

How Is Dilution Impacting Shenzhen Kinwong Electronic's Earnings Per Share (EPS)?

Shenzhen Kinwong Electronic has improved its profit over the last three years, with an annualized gain of 31% in that time. And in the last year the company managed to bump profit up by 18%. But in comparison, EPS only increased by 17% over the same period. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, earnings per share growth should beget share price growth. So Shenzhen Kinwong Electronic 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.

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 Shenzhen Kinwong Electronic's Profit Performance

Shenzhen Kinwong Electronic 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 Kinwong Electronic's statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 30% per annum growth in EPS for the last three. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. You'd be interested to know, that we found 3 warning signs for Shenzhen Kinwong Electronic and you'll want to know about these.

This note has only looked at a single factor that sheds light on the nature of Shenzhen Kinwong Electronic's 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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks with significant insider holdings to be useful.

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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.