China Sunshine Paper Holdings Company Limited (HKG:2002) just reported some strong earnings, and the market rewarded them with a positive share price move. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.
In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, China Sunshine Paper Holdings increased the number of shares on issue by 10% over the last twelve months by issuing new shares. As a result, its net income is now split between a greater number of shares. 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 China Sunshine Paper Holdings' historical EPS growth by clicking on this link.
A Look At The Impact Of China Sunshine Paper Holdings' Dilution on Its Earnings Per Share (EPS).
As you can see above, China Sunshine Paper Holdings has been growing its net income over the last few years, with an annualized gain of 26% over three years. And at a glance the 42% gain in profit over the last year impresses. But in comparison, EPS only increased by 42% 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 it will certainly be a positive for shareholders if China Sunshine Paper Holdings can grow EPS persistently. 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 China Sunshine Paper Holdings.
Our Take On China Sunshine Paper Holdings' Profit Performance
China Sunshine Paper Holdings 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 China Sunshine Paper Holdings' statutory profits are better than its underlying earnings power. Nonetheless, it's still worth noting that its earnings per share have grown at 24% over the last three years. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. In terms of investment risks, we've identified 3 warning signs with China Sunshine Paper Holdings, and understanding them should be part of your investment process.
This note has only looked at a single factor that sheds light on the nature of China Sunshine Paper Holdings' profit. 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. 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 that insiders are buying to be useful.
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China Sunshine Paper Holdings
China Sunshine Paper Holdings Company Limited, together with its subsidiaries, produces and sells paper products in the People's Republic of China and internationally.
Slightly overvalued with imperfect balance sheet.