China Metal Products' (TWSE:1532) Promising Earnings May Rest On Soft Foundations

Despite announcing strong earnings, China Metal Products Co., Ltd.'s (TWSE:1532) stock was sluggish. We think that the market might be paying attention to some underlying factors that they find to be concerning.

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In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, China Metal Products issued 6.6% more new shares over the last year. As a result, its net income is now split between a greater number of shares. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. Check out China Metal Products' historical EPS growth by clicking on this link.

A Look At The Impact Of China Metal Products' Dilution On Its Earnings Per Share (EPS)

As you can see above, China Metal Products' net profit is roughly the same as what it was three years ago. Meanwhile EPS has dropped 5.3% per year over the same time frame. The profit growth of 24% in the last twelve months certainly seems very impressive. On the other hand, earnings per share are only up 19% in the same time frame. 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 China Metal Products 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 China Metal Products.

Our Take On China Metal Products' Profit Performance

Each China Metal Products share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Therefore, it seems possible to us that China Metal Products' true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 19% EPS growth in the last year. 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. If you'd like to know more about China Metal Products as a business, it's important to be aware of any risks it's facing. Be aware that China Metal Products is showing 2 warning signs in our investment analysis and 1 of those doesn't sit too well with us...

Today we've zoomed in on a single data point to better understand the nature of China Metal Products' 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. 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.