Caribbean Utilities Company's (TSE:CUP.U) Solid Earnings May Rest On Weak Foundations

Caribbean Utilities Company, Ltd.'s (TSE:CUP.U) healthy profit numbers didn't contain any surprises for investors. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.

See our latest analysis for Caribbean Utilities Company

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, Caribbean Utilities Company increased the number of shares on issue by 11% over the last twelve months by issuing new shares. That means its earnings are split among 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. You can see a chart of Caribbean Utilities Company's EPS by clicking here.

How Is Dilution Impacting Caribbean Utilities Company's Earnings Per Share (EPS)?

Caribbean Utilities Company has improved its profit over the last three years, with an annualized gain of 38% in that time. And over the last 12 months, the company grew its profit by 5.8%. But in comparison, EPS only increased by 4.8% over the same period. And so, you can see quite clearly that dilution is influencing shareholder earnings.

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 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 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. But at least holders can take some solace from the 34% per annum growth in EPS for the last three. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing Caribbean Utilities Company at this point in time. To that end, you should learn about the 3 warning signs we've spotted with Caribbean Utilities Company (including 1 which shouldn't be ignored).

Today we've zoomed in on a single data point to better understand the nature of Caribbean Utilities Company'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.