Investors Shouldn't Be Too Comfortable With Chalet Hotels' (NSE:CHALET) Earnings

Chalet Hotels Limited (NSE:CHALET) announced strong profits, but the stock was stagnant. We did some digging, and we found some concerning factors in the details.

See our latest analysis for Chalet Hotels

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Chalet Hotels issued 6.4% 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 Chalet Hotels' EPS by clicking here.

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

Chalet Hotels was losing money three years ago. The good news is that profit was up 72% in the last twelve months. On the other hand, earnings per share are only up 72% 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 it will certainly be a positive for shareholders if Chalet Hotels 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 Chalet Hotels' Profit Performance

Each Chalet Hotels share now gets a meaningfully smaller slice of its overall profit, due to dilution of existing shareholders. Therefore, it seems possible to us that Chalet Hotels' true underlying earnings power is actually less than its statutory profit. The good news is that, its earnings per share increased by 72% in the 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. To help with this, we've discovered 2 warning signs (1 is a bit unpleasant!) that you ought to be aware of before buying any shares in Chalet Hotels.

This note has only looked at a single factor that sheds light on the nature of Chalet Hotels' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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. 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.