Kodiak Gas Services' (NYSE:KGS) Sluggish Earnings Might Be Just The Beginning Of Its Problems

Despite Kodiak Gas Services, Inc.'s (NYSE:KGS) most recent earnings report having soft headline numbers, its stock has had a positive performance. We did some analysis and found some positive factors that investors might be paying attention to rather than profit.

See our latest analysis for Kodiak Gas Services

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Kodiak Gas Services issued 13% more new shares over the last year. As a result, its net income is now split between 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. You can see a chart of Kodiak Gas Services' EPS by clicking here.

A Look At The Impact Of Kodiak Gas Services' Dilution On Its Earnings Per Share (EPS)

Kodiak Gas Services' net profit dropped by 83% per year over the last three years. And even focusing only on the last twelve months, we see profit is down 22%. Sadly, earnings per share fell further, down a full 38% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, if Kodiak Gas Services' 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 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.

The Impact Of Unusual Items On Profit

On top of the dilution, we should also consider the US$51m impact of unusual items in the last year, which had the effect of suppressing profit. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. If Kodiak Gas Services doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Kodiak Gas Services' Profit Performance

Kodiak Gas Services suffered from unusual items which depressed its profit in its last report; if that is not repeated then profit should be higher, all else being equal. But on the other hand, the company issued more shares, so without buying more shares each shareholder will end up with a smaller part of the profit. Given the contrasting considerations, we don't have a strong view as to whether Kodiak Gas Services's profits are an apt reflection of its underlying potential for profit. So while earnings quality is important, it's equally important to consider the risks facing Kodiak Gas Services at this point in time. Every company has risks, and we've spotted 5 warning signs for Kodiak Gas Services (of which 2 can't be ignored!) you should know about.

Our examination of Kodiak Gas Services has focussed on certain factors that can make its earnings look better than they are. 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.