Are Chefs’ Warehouse’s (NASDAQ:CHEF) Statutory Earnings A Good Guide To Its Underlying Profitability?

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it’s not always clear whether statutory profits are a good guide, going forward. In this article, we’ll look at how useful this year’s statutory profit is, when analysing Chefs’ Warehouse (NASDAQ:CHEF).

It’s good to see that over the last twelve months Chefs’ Warehouse made a profit of US$22.2m on revenue of US$1.56b. One positive is that it has grown both its profit and its revenue, over the last few years.

View our latest analysis for Chefs’ Warehouse

NasdaqGS:CHEF Income Statement, January 13th 2020
NasdaqGS:CHEF Income Statement, January 13th 2020

Importantly, statutory profits are not always the best tool for understanding a company’s true earnings power, so it’s well worth examining profits in a little more detail. In this article we’ll look at how Chefs’ Warehouse 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.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Chefs’ Warehouse issued 5.5% more new shares over the last year. As a result, its net income is now split between a greater number of shares. 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. Check out Chefs’ Warehouse’s historical EPS growth by clicking on this link.

A Look At The Impact Of Chefs’ Warehouse’s Dilution on Its Earnings Per Share (EPS).

As you can see above, Chefs’ Warehouse has been growing its net income over the last few years, with an annualized gain of 3380% over three years. In comparison, earnings per share only gained 2957% over the same period. And over the last 12 months, the company grew its profit by 5.7%. On the other hand, earnings per share are pretty much flat, over the last twelve months. 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 returnsAnd so, you can see quite clearly that dilution is influencing shareholder earnings.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Chefs’ Warehouse shareholders will want to see that EPS figure continue to increase. 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 Chefs’ Warehouse’s Profit Performance

Chefs’ Warehouse 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 Chefs’ Warehouse’s true underlying earnings power is actually less than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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. While it’s really important to consider how well a company’s statutory earnings represent its true earnings power, it’s also worth taking a look at what analysts are forecasting for the future. At Simply Wall St, we have analyst estimates which you can view by clicking here.

Today we’ve zoomed in on a single data point to better understand the nature of Chefs’ Warehouse’s 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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.