CWG Holdings Berhad's (KLSE:CWG) Solid Profits Have Weak Fundamentals

Despite announcing strong earnings, CWG Holdings Berhad's (KLSE:CWG) stock was sluggish. We did some digging and found some worrying underlying problems.

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To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. CWG Holdings Berhad expanded the number of shares on issue by 60% over the last year. That means its earnings are split among 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. Check out CWG Holdings Berhad's historical EPS growth by clicking on this link.

How Is Dilution Impacting CWG Holdings Berhad's Earnings Per Share (EPS)?

We don't have any data on the company's profits from three years ago. Zooming in to the last year, we still can't talk about growth rates coherently, since it made a loss last year. 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 CWG Holdings Berhad's earnings per share can increase, then the share price should too. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. 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 CWG Holdings Berhad.

Our Take On CWG Holdings Berhad's Profit Performance

CWG Holdings Berhad issued shares during the year, and that means its EPS performance lags its net income growth. As a result, we think it may well be the case that CWG Holdings Berhad's underlying earnings power is lower than its statutory profit. The good news is that it earned a profit in the last twelve months, despite its previous loss. 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 CWG Holdings Berhad at this point in time. Every company has risks, and we've spotted 3 warning signs for CWG Holdings Berhad (of which 1 is potentially serious!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of CWG Holdings Berhad's 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 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.