Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. 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. Today we’ll focus on whether this year’s statutory profits are a good guide to understanding Chesapeake Utilities (NYSE:CPK).
We like the fact that Chesapeake Utilities made a profit of US$66.1m on its revenue of US$483.1m, in the last year. As depicted below, while its revenue may have fallen over the last few years, its profit actually improved.
Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. In this article we’ll look at how Chesapeake Utilities is impacting shareholders by issuing new shares. That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.
To understand the value of a company’s earnings growth, it is imperative to consider any dilution of shareholders’ interests. In fact, Chesapeake Utilities increased the number of shares on issue by 6.4% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. 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. You can see a chart of Chesapeake Utilities’ EPS by clicking here.
A Look At The Impact Of Chesapeake Utilities’ Dilution on Its Earnings Per Share (EPS).
Chesapeake Utilities has improved its profit over the last three years, with an annualized gain of 50% in that time. And in the last year the company managed to bump profit up by 7.2%. But in comparison, EPS only increased by 6.8% over the same period. 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, earnings per share growth should beget share price growth. So Chesapeake Utilities 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.
Our Take On Chesapeake Utilities’ Profit Performance
Each Chesapeake Utilities share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Therefore, it seems possible to us that Chesapeake Utilities’ true underlying earnings power is actually less than its statutory profit. Nonetheless, it’s still worth noting that its earnings per share have grown at 49% over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company’s potential, but there is plenty more to consider. So if you’d like to dive deeper into this stock, it’s crucial to consider any risks it’s facing. When we did our research, we found 3 warning signs for Chesapeake Utilities (1 makes us a bit uncomfortable!) that we believe deserve your full attention.
Today we’ve zoomed in on a single data point to better understand the nature of Chesapeake Utilities’ profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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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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