There May Be Underlying Issues With The Quality Of Celestica's (TSE:CLS) Earnings

Despite announcing strong earnings, Celestica Inc.'s (TSE:CLS) stock was sluggish. We did some digging and found some worrying underlying problems.

Check out our latest analysis for Celestica

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Celestica issued 5.2% 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 Celestica's historical EPS growth by clicking on this link.

A Look At The Impact Of Celestica's Dilution On Its Earnings Per Share (EPS)

Celestica has improved its profit over the last three years, with an annualized gain of 319% in that time. And the 117% profit boost in the last year certainly seems impressive at first glance. But in comparison, EPS only increased by 122% over the same period. And 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 it will certainly be a positive for shareholders if Celestica can grow EPS persistently. 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.

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 Celestica's Profit Performance

Celestica shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Because of this, we think that it may be that Celestica's statutory profits are better than its underlying earnings power. 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. If you'd like to know more about Celestica as a business, it's important to be aware of any risks it's facing. At Simply Wall St, we found 2 warning signs for Celestica and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Celestica's profit. But there are plenty of other ways to inform your opinion of a company. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com