Despite strong earnings The company Lighthouse Properties plc (JSE:LTE) has been little moved over the past week. We believe investors may be concerned about earnings fundamentals.
Check out our latest analysis for Lighthouse Properties
A closer look at Lighthouse Properties’ earnings
In high finance, the most important metric that measures how well a company converts reported earnings into free cash flow (FCF) is the Delimitation ratio (from cash flow). The accrual ratio subtracts FCF from profit for a given period and divides the result by the company’s average funds from operations for that period. You can think of the accrual ratio from cash flow as the “non-FCF profit ratio.”
This means that a negative accrual ratio is a good thing because it shows that the company is generating more free cash flow than its profit would suggest. While an accrual ratio above zero is of little concern, we think it is noteworthy when a company has a relatively high accrual ratio. This is because some academic studies have pointed out that high accrual ratios tend to lead to lower profits or lower profit growth.
Lighthouse Properties has an accrual ratio of 0.39 for the year to June 2024. Ergo, its free cash flow is significantly weaker than its profit. In general, that doesn’t bode well for future profitability. That said, it generated free cash flow of €38m during that period, falling well short of its reported profit of €403.3m. At this point, we should mention that Lighthouse Properties actually managed to grow its free cash flow over the last twelve months. However, there’s more to consider. We also need to consider the impact of unusual items on statutory profit (and hence the accrual ratio), and note the consequences of the company issuing new shares. The good news for shareholders is that Lighthouse Properties’ accrual ratio was much better last year, so the poor reading this year could simply be due to a short-term mismatch between profit and FCF. Shareholders should expect improved cash flow relative to earnings this year, if this is indeed the case.
Note: We always recommend investors check balance sheet strength. Click here to access our balance sheet analysis of Lighthouse Properties.
To understand the potential for per share return, it is important to consider how much a company dilutes shareholders. In fact, Lighthouse Properties issued 7.7% more new shares last year. This means that profits are being split between a larger number of shares. Celebrating net income while ignoring dilution is like being happy 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 Lighthouse Properties’ earnings per share by clicking here.
A look at the impact of Lighthouse Properties’ dilution on earnings per share (EPS)
Lighthouse Properties made a loss three years ago. On the positive side, profits have increased by 1,072% in the last twelve months. On the other hand, profits per share have only increased by 996% over the same period. So you can see that dilution has had some impact on shareholders.
Long-term returns per share Growth should lead to an increase in the share price, so it will certainly be positive for shareholders if Lighthouse Properties can grow earnings per share on a consistent basis. However, if earnings per share increase while earnings per share remain stagnant (or even decline), shareholders may not benefit much. For this reason, one could say that earnings per share are more important than net income in the long run, assuming the goal is to assess whether a company’s share price could increase.
How do unusual items affect profits?
In addition to the notable provisioning ratio and the increase in non-operating income, we can also see that Lighthouse Properties has benefited from unusual items worth €331 million over 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 analyzed the numbers of thousands of listed companies, we found that an increase from unusual items in a given year is often not repeated next year. And that’s to be expected, given that these increases are described as “unusual.” We can see that Lighthouse Properties’ positive unusual items were quite significant relative to its profit in the year to June 2024. All else being equal, this would likely result in statutory profit not being a good indicator of underlying earnings power.
Our assessment of Lighthouse Properties’ earnings development
Lighthouse Properties failed to back up its earnings with free cash flow, but that’s not too surprising given that earnings were inflated by unusual items. The dilution means that results are weaker from a per share perspective. Upon closer inspection, the above factors give us the strong impression that Lighthouse Properties’ underlying earnings power is not as good as it may appear based on its statutory profit figures. So if you want to dig deeper into this stock, it’s important to consider all the risks it faces. Case in point: We discovered 4 warning signs for Lighthouse Properties You should be aware of this and two of them cannot be ignored.
In this article, we’ve looked at a number of factors that can affect the usefulness of earnings numbers, and we’ve done so with caution. But there’s always more to discover if you’re able to focus on the small details. Some people consider a high return on equity to be a good sign of a high-quality company. Although this may require a little research, you may find that free Collection of companies with high return on equity or this list of stocks with significant insider holdings may prove useful.
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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
