Are Calian Group's (TSE:CGY) Statutory Earnings A Good Guide To Its Underlying Profitability?

By
Simply Wall St
Published
February 10, 2021
TSX:CGY
Source: Shutterstock

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. This article will consider whether Calian Group's (TSE:CGY) statutory profits are a good guide to its underlying earnings.

While Calian Group was able to generate revenue of CA$449.3m in the last twelve months, we think its profit result of CA$18.5m was more important. In the chart below, you can see that its profit and revenue have both grown over the last three years, although its profit has slipped in the last twelve months.

See our latest analysis for Calian Group

earnings-and-revenue-history
TSX:CGY Earnings and Revenue History February 11th 2021

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 will consider how Calian Group's decision to issue new shares in the company has impacted returns to shareholders. 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. Calian Group expanded the number of shares on issue by 22% 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. Check out Calian Group's historical EPS growth by clicking on this link.

How Is Dilution Impacting Calian Group's Earnings Per Share? (EPS)

Calian Group has improved its profit over the last three years, with an annualized gain of 14% in that time. Net income was down 12% over the last twelve months. But the EPS result was even worth, with the company recording a decline of 12%. 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, if Calian Group's earnings per share can increase, then the share price should too. 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 Calian Group's Profit Performance

Over the last year Calian Group issued new shares and so, there's a noteworthy divergence between EPS and net income growth. Therefore, it seems possible to us that Calian Group's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 11% per annum growth in EPS for the last three. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. At Simply Wall St, we found 1 warning sign for Calian Group and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Calian Group'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.

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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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