Investors were disappointed with the weak earnings posted by Casella Waste Systems, Inc. (NASDAQ:CWST ). While the headline numbers were soft, we believe that investors might be missing some encouraging factors.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Casella Waste Systems increased the number of shares on issue by 12% over the last twelve months by issuing new shares. That means its earnings are split among a greater number of shares. 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. Check out Casella Waste Systems' historical EPS growth by clicking on this link.

How Is Dilution Impacting Casella Waste Systems' Earnings Per Share (EPS)?

Casella Waste Systems' net profit dropped by 81% per year over the last three years. And even focusing only on the last twelve months, we see profit is down 66%. Sadly, earnings per share fell further, down a full 69% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, if Casella Waste Systems' 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 Impact Of Unusual Items On Profit

Alongside that dilution, it's also important to note that Casella Waste Systems' profit suffered from unusual items, which reduced profit by US$31m in the last twelve months. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Casella Waste Systems to produce a higher profit next year, all else being equal.

Our Take On Casella Waste Systems' Profit Performance

Casella Waste Systems 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. Considering the aforementioned, we think that Casella Waste Systems' profits are probably a reasonable reflection of its underlying profitability; although we'd be confident in that conclusion if we saw a cleaner set of results. So while earnings quality is important, it's equally important to consider the risks facing Casella Waste Systems at this point in time. Be aware that Casella Waste Systems is showing 5 warning signs in our investment analysis and 1 of those is a bit unpleasant...

Our examination of Casella Waste Systems has focussed on certain factors that can make its earnings look better than they are. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.