Shandong Ruifeng Chemical Co., Ltd. (SZSE:300243) announced strong profits, but the stock was stagnant. We did some digging, and we found some concerning factors in the details.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Shandong Ruifeng Chemical issued 7.8% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. You can see a chart of Shandong Ruifeng Chemical's EPS by clicking here.

How Is Dilution Impacting Shandong Ruifeng Chemical's Earnings Per Share (EPS)?

Shandong Ruifeng Chemical's net profit dropped by 27% per year over the last three years. The good news is that profit was up 63% in the last twelve months. On the other hand, earnings per share are only up 58% 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 it will certainly be a positive for shareholders if Shandong Ruifeng Chemical 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 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 Shandong Ruifeng Chemical.

Our Take On Shandong Ruifeng Chemical's Profit Performance

Each Shandong Ruifeng Chemical 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 Shandong Ruifeng Chemical's statutory profits are better than its underlying earnings power. The good news is that, its earnings per share increased by 58% 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. So while earnings quality is important, it's equally important to consider the risks facing Shandong Ruifeng Chemical at this point in time. To help with this, we've discovered 4 warning signs (3 are a bit unpleasant!) that you ought to be aware of before buying any shares in Shandong Ruifeng Chemical.

Today we've zoomed in on a single data point to better understand the nature of Shandong Ruifeng Chemical'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 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.