California Water Service Group's (NYSE:CWT) Promising Earnings May Rest On Soft Foundations

By
Simply Wall St
Published
November 03, 2021
NYSE:CWT
Source: Shutterstock

California Water Service Group's (NYSE:CWT) stock was strong after they reported robust earnings. However, our analysis suggests that shareholders may be missing some factors that indicate the earnings result was not as good as it looked.

View our latest analysis for California Water Service Group

earnings-and-revenue-history
NYSE:CWT Earnings and Revenue History November 4th 2021

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. California Water Service Group expanded the number of shares on issue by 6.5% over the last year. Therefore, each share now receives a smaller portion of profit. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of California Water Service Group's EPS by clicking here.

How Is Dilution Impacting California Water Service Group's Earnings Per Share? (EPS)

California Water Service Group has improved its profit over the last three years, with an annualized gain of 63% in that time. And at a glance the 22% gain in profit over the last year impresses. But in comparison, EPS only increased by 17% over the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So California Water Service Group shareholders will want to see that EPS figure continue to increase. 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.

Our Take On California Water Service Group's Profit Performance

California Water Service Group shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Because of this, we think that it may be that California Water Service Group's statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 54% per annum growth in EPS for the last three. 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. Be aware that California Water Service Group is showing 3 warning signs in our investment analysis and 1 of those is potentially serious...

This note has only looked at a single factor that sheds light on the nature of California Water Service Group's 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 that insiders are buying to be useful.

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