Chesapeake Utilities' (NYSE:CPK) Earnings Are Of Questionable Quality

Chesapeake Utilities Corporation's (NYSE:CPK) robust earnings report didn't manage to move the market for its stock. Our analysis suggests that shareholders have noticed something concerning in the numbers.

View our latest analysis for Chesapeake Utilities

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Chesapeake Utilities increased the number of shares on issue by 5.2% over the last twelve months by issuing new shares. 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. You can see a chart of Chesapeake Utilities' EPS by clicking here.

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

As you can see above, Chesapeake Utilities has been growing its net income over the last few years, with an annualized gain of 30% over three years. But EPS was only up 4.6% per year, in the exact same period. And the 22% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are pretty much flat, over the last twelve months. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, if Chesapeake Utilities' 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 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 Power Of Non-Operating Revenue

Most companies divide classify their revenue as either 'operating revenue', which comes from normal operations, and other revenue, which could include government grants, for example. Where possible, we prefer rely on operating revenue to get a better understanding of how the business is functioning. However, we note that when non-operating revenue increases suddenly, it will sometimes generate an unsustainable boost to profit. As well as the aforementioned dilution, Chesapeake Utilities saw a spike in non-operating revenue, over the last year. Indeed, its non-operating revenue rose from -US$48.9m last year to -US$24.3m this year. If that non-operating revenue fails to manifest in the current year, then there's a real risk the bottom line profit result will be impacted negatively. In order to better understand a company's profit result, it can sometimes help to consider whether the result would be very different without a sudden increase in non-operating revenue.

Our Take On Chesapeake Utilities' Profit Performance

In the last year Chesapeake Utilities' non-operating revenue really gave it a boost, but not in a way that is necessarily going to be sustained. And the fact that it issued more shares means that its results look weaker from a per-share perspective. For the reasons mentioned above, we think that a perfunctory glance at Chesapeake Utilities' statutory profits might make it look better than it really is on an underlying level. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example, Chesapeake Utilities has 3 warning signs (and 1 which can't be ignored) we think you should know about.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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. 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.