Investors Shouldn't Be Too Comfortable With CHK Oil's (HKG:632) Robust Earnings

CHK Oil Limited's (HKG:632) 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.

Check out our latest analysis for CHK Oil

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. CHK Oil expanded the number of shares on issue by 38% 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 CHK Oil's EPS by clicking here.

How Is Dilution Impacting CHK Oil's Earnings Per Share? (EPS)

CHK Oil was losing money three years ago. 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.

In the long term, if CHK Oil's earnings per share can increase, then the share price should too. 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of CHK Oil.

Our Take On CHK Oil's Profit Performance

Over the last year CHK Oil issued new shares and so, there's a noteworthy divergence between EPS and net income growth. As a result, we think it may well be the case that CHK Oil's underlying earnings power is lower than its statutory profit. On the bright side, the company showed enough improvement to book a profit this year, after losing money last year. 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. So while earnings quality is important, it's equally important to consider the risks facing CHK Oil at this point in time. Every company has risks, and we've spotted 3 warning signs for CHK Oil you should know about.

This note has only looked at a single factor that sheds light on the nature of CHK Oil'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 that insiders are buying.

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This article by Simply Wall St is general in nature. 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.
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