Pinnacle West Capital's (NYSE:PNW) Promising Earnings May Rest On Soft Foundations

Despite posting some strong earnings, the market for Pinnacle West Capital Corporation's (NYSE:PNW) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

See our latest analysis for Pinnacle West Capital

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Pinnacle West Capital increased the number of shares on issue by 5.0% 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 Pinnacle West Capital's EPS by clicking here.

A Look At The Impact Of Pinnacle West Capital's Dilution On Its Earnings Per Share (EPS)

As you can see above, Pinnacle West Capital's net profit is roughly the same as what it was three years ago. In contrast, its earnings per share is down 2.4% per year over the same period. The 21% increase in profit would have impressed many. Then again, EPS was only up 21% over that 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 it will certainly be a positive for shareholders if Pinnacle West Capital 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 the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

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 Pinnacle West Capital's Profit Performance

Pinnacle West Capital 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 Pinnacle West Capital's true underlying earnings power is actually less than its statutory profit. The good news is that, its earnings per share increased by 21% in the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you want to do dive deeper into Pinnacle West Capital, you'd also look into what risks it is currently facing. For example, we've found that Pinnacle West Capital has 2 warning signs (1 is a bit concerning!) that deserve your attention before going any further with your analysis.

Today we've zoomed in on a single data point to better understand the nature of Pinnacle West Capital'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. 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.