Caribbean Utilities Company's (TSE:CUP.U) Earnings Are Of Questionable Quality

Caribbean Utilities Company, Ltd.'s (TSE:CUP.U) robust earnings report didn't manage to move the market for its stock. We did some digging, and we found some concerning factors in the details.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, Caribbean Utilities Company issued 11% more new shares over the last year. As a result, its net income is now split between a greater number of shares. 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 Caribbean Utilities Company's EPS by clicking here.

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

As you can see above, Caribbean Utilities Company has been growing its net income over the last few years, with an annualized gain of 37% over three years. And over the last 12 months, the company grew its profit by 12%. But in comparison, EPS only increased by 6.3% over the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, earnings per share growth should beget share price growth. So Caribbean Utilities Company 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.

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 Caribbean Utilities Company's Profit Performance

Each Caribbean Utilities Company share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Therefore, it seems possible to us that Caribbean Utilities Company's 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 28% 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. If you want to do dive deeper into Caribbean Utilities Company, you'd also look into what risks it is currently facing. To help with this, we've discovered 2 warning signs (1 makes us a bit uncomfortable!) that you ought to be aware of before buying any shares in Caribbean Utilities Company.

Today we've zoomed in on a single data point to better understand the nature of Caribbean Utilities Company's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.

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

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.