The market for Shenzhen Farben Information Technology Co.,Ltd.'s (SZSE:300925) stock was strong after it released a healthy earnings report last week. While the profit numbers were good, our analysis has found some concerning factors that shareholders should be aware of.
To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, Shenzhen Farben Information TechnologyLtd increased the number of shares on issue by 14% over the last twelve months by issuing new shares. 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 Shenzhen Farben Information TechnologyLtd's historical EPS growth by clicking on this link.
A Look At The Impact Of Shenzhen Farben Information TechnologyLtd's Dilution On Its Earnings Per Share (EPS)
Unfortunately, Shenzhen Farben Information TechnologyLtd's profit is down 3.8% per year over three years. The good news is that profit was up 4.9% in the last twelve months. But EPS was far less impressive, dropping 2.4% in that time. This shows how dangerous it is to rely on net income alone, when measuring growth. So you can see that the dilution has had a bit of an impact on shareholders.
If Shenzhen Farben Information TechnologyLtd's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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 Shenzhen Farben Information TechnologyLtd.
Our Take On Shenzhen Farben Information TechnologyLtd's Profit Performance
Shenzhen Farben Information TechnologyLtd shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Therefore, it seems possible to us that Shenzhen Farben Information TechnologyLtd's true underlying earnings power is actually less than its statutory profit. In further bad news, its earnings per share decreased in 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. If you'd like to know more about Shenzhen Farben Information TechnologyLtd as a business, it's important to be aware of any risks it's facing. While conducting our analysis, we found that Shenzhen Farben Information TechnologyLtd has 3 warning signs and it would be unwise to ignore them.
This note has only looked at a single factor that sheds light on the nature of Shenzhen Farben Information TechnologyLtd's 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 with significant insider holdings 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.