China Sunshine Paper Holdings' (HKG:2002) Profits May Not Reveal Underlying Issues

China Sunshine Paper Holdings Company Limited's (HKG:2002) robust recent earnings didn't do much to move the stock. However the statutory profit number doesn't tell the whole story, and we have found some factors which might be of concern to shareholders.

View our latest analysis for China Sunshine Paper Holdings

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. China Sunshine Paper Holdings expanded the number of shares on issue by 9.6% over the last year. 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. You can see a chart of China Sunshine Paper Holdings' EPS by clicking here.

A Look At The Impact Of China Sunshine Paper Holdings' Dilution On Its Earnings Per Share (EPS)

China Sunshine Paper Holdings' net profit dropped by 21% per year over the last three years. The good news is that profit was up 91% in the last twelve months. On the other hand, earnings per share are only up 94% over the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, earnings per share growth should beget share price growth. So China Sunshine Paper Holdings 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 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 China Sunshine Paper Holdings.

Our Take On China Sunshine Paper Holdings' Profit Performance

Each China Sunshine Paper Holdings share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Because of this, we think that it may be that China Sunshine Paper Holdings' 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. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Our analysis shows 3 warning signs for China Sunshine Paper Holdings (1 is a bit unpleasant!) and we strongly recommend you look at these bad boys before investing.

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. 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 that insiders are buying 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.