Colt CZ Group's (SEP:CZG) Weak Earnings May Only Reveal A Part Of The Whole Picture

Colt CZ Group SE's (SEP:CZG) recent weak earnings report didn't cause a big stock movement. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

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One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Colt CZ Group issued 61% more new shares over the last year. That means its earnings are split among a greater number of shares. 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 Colt CZ Group's historical EPS growth by clicking on this link.

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

Colt CZ Group has improved its profit over the last three years, with an annualized gain of 23% in that time. In contrast, earnings per share were actually down by 22% per year, in the exact same period. Net profit actually dropped by 28% in the last year. But the EPS result was even worse, with the company recording a decline of 51%. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

If Colt CZ Group's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. 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 Colt CZ Group's Profit Performance

Colt CZ Group issued shares during the year, and that means its EPS performance lags its net income growth. For this reason, we think that Colt CZ Group's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. In further bad news, its earnings per share decreased in the last year. 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. So while earnings quality is important, it's equally important to consider the risks facing Colt CZ Group at this point in time. Every company has risks, and we've spotted 3 warning signs for Colt CZ Group (of which 1 shouldn't be ignored!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Colt CZ Group'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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks with significant insider holdings to be useful.

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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.