Stock Analysis

West Fraser Timber (TSE:WFG) Posted Healthy Earnings But There Are Some Other Factors To Be Aware Of

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TSX:WFG
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Despite posting some strong earnings, the market for West Fraser Timber Co. Ltd.'s (TSE:WFG) stock hasn't moved much. Our analysis suggests that shareholders have noticed something concerning in the numbers.

See our latest analysis for West Fraser Timber

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TSX:WFG Earnings and Revenue History February 23rd 2021

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. West Fraser Timber expanded the number of shares on issue by 79% over the last year. Therefore, each share now receives a smaller portion of profit. 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. You can see a chart of West Fraser Timber's EPS by clicking here.

How Is Dilution Impacting West Fraser Timber's Earnings Per Share? (EPS)

Unfortunately, we don't have any visibility into its profits three years back, because we lack the data. And even focusing only on the last twelve months, we don't have a meaningful growth rate because it made a loss a year ago, too. What we do know is that while it's great to see a profit over the last twelve months, that profit would have been better, on a per share basis, if the company hadn't needed to issue shares. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

If West Fraser Timber'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 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.

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.

Our Take On West Fraser Timber's Profit Performance

West Fraser Timber issued shares during the year, and that means its EPS performance lags its net income growth. For this reason, we think that West Fraser Timber's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The good news is that it earned a profit in the last twelve months, despite its previous loss. 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. If you'd like to know more about West Fraser Timber as a business, it's important to be aware of any risks it's facing. In terms of investment risks, we've identified 1 warning sign with West Fraser Timber, and understanding it should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of West Fraser Timber'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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