Following the release of a positive earnings report recently, Capital Clean Energy Carriers Corp.'s (NASDAQ:CCEC) stock performed well. Investors should be cautious however, as there some causes of concern deeper in the numbers.
Examining Cashflow Against Capital Clean Energy Carriers' Earnings
As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.
Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".
For the year to June 2024, Capital Clean Energy Carriers had an accrual ratio of 0.59. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Over the last year it actually had negative free cash flow of US$946m, in contrast to the aforementioned profit of US$96.3m. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of US$946m, this year, indicates high risk. However, that's not the end of the story. We can look at how unusual items in the profit and loss statement impacted its accrual ratio, as well as explore how dilution is impacting shareholders negatively.
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.
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Capital Clean Energy Carriers increased the number of shares on issue by 193% over the last twelve months by issuing new shares. As a result, its net income is now split between 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. You can see a chart of Capital Clean Energy Carriers' EPS by clicking here.
A Look At The Impact Of Capital Clean Energy Carriers' Dilution On Its Earnings Per Share (EPS)
Capital Clean Energy Carriers has improved its profit over the last three years, with an annualized gain of 64% in that time. In contrast, earnings per share were actually down by 23% per year, in the exact same period. And over the last 12 months, the company grew its profit by 3.4%. But that's starkly different from the 48% drop in earnings per share. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.
In the long term, if Capital Clean Energy Carriers' 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 the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.
How Do Unusual Items Influence Profit?
Given the accrual ratio, it's not overly surprising that Capital Clean Energy Carriers' profit was boosted by unusual items worth US$28m in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. If Capital Clean Energy Carriers doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.
Our Take On Capital Clean Energy Carriers' Profit Performance
Capital Clean Energy Carriers didn't back up its earnings with free cashflow, but this isn't too surprising given profits were inflated by unusual items. The dilution means the results are weaker when viewed from a per-share perspective. For all the reasons mentioned above, we think that, at a glance, Capital Clean Energy Carriers' statutory profits could be considered to be low quality, because they are likely to give investors an overly positive impression of the company. If you want to do dive deeper into Capital Clean Energy Carriers, you'd also look into what risks it is currently facing. To that end, you should learn about the 5 warning signs we've spotted with Capital Clean Energy Carriers (including 4 which shouldn't be ignored).
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.
