CSW Industrials' (NASDAQ:CSWI) Profits Appear To Have Quality Issues

CSW Industrials, Inc.'s (NASDAQ:CSWI) robust recent earnings didn't do much to move the stock. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.

See our latest analysis for CSW Industrials

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, CSW Industrials increased the number of shares on issue by 8.1% over the last twelve months by issuing new shares. 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 CSW Industrials' EPS by clicking here.

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

CSW Industrials has improved its profit over the last three years, with an annualized gain of 129% in that time. And in the last year the company managed to bump profit up by 12%. On the other hand, earnings per share are only up 11% in that time. 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 it will certainly be a positive for shareholders if CSW Industrials 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 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 CSW Industrials' Profit Performance

CSW Industrials shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Therefore, it seems possible to us that CSW Industrials' true underlying earnings power is actually less than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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. If you want to do dive deeper into CSW Industrials, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 1 warning sign with CSW Industrials, and understanding it should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of CSW Industrials' 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.