Does Sheh Fung Screws's (GTSM:2065) Statutory Profit Adequately Reflect Its Underlying Profit?

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. In this article, we'll look at how useful this year's statutory profit is, when analysing Sheh Fung Screws (GTSM:2065).

While Sheh Fung Screws was able to generate revenue of NT$1.99b in the last twelve months, we think its profit result of NT$124.8m was more important. Happily, it has grown both its profit and revenue over the last three years (though we note its profit is down over the last year).

Check out our latest analysis for Sheh Fung Screws

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. In this article we will consider how Sheh Fung Screws' decision to issue new shares in the company has impacted returns to shareholders. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Sheh Fung Screws.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Sheh Fung Screws issued 8.6% 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. You can see a chart of Sheh Fung Screws' EPS by clicking here.

A Look At The Impact Of Sheh Fung Screws' Dilution on Its Earnings Per Share (EPS).

Sheh Fung Screws has improved its profit over the last three years, with an annualized gain of 155% in that time. In comparison, earnings per share only gained 138% over the same period. Net income was down 13% over the last twelve months. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 14%. So you can see that the dilution has had a bit of an impact on shareholders. Therefore, the dilution is having a noteworthy influence on shareholder returns. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, if Sheh Fung Screws' earnings per share can increase, then the share price should too. 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.

Our Take On Sheh Fung Screws' Profit Performance

Over the last year Sheh Fung Screws issued new shares and so, there's a noteworthy divergence between EPS and net income growth. Because of this, we think that it may be that Sheh Fung Screws' statutory profits are better than its underlying earnings power. But the good news is that its EPS growth over the last three years has been very impressive. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Every company has risks, and we've spotted 3 warning signs for Sheh Fung Screws (of which 1 is potentially serious!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of Sheh Fung Screws' profit. 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. 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. 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.
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