Modiin Energy-Limited Partnership's (TLV:MDIN) Earnings Are Of Questionable Quality

Modiin Energy-Limited Partnership (TLV:MDIN) announced strong profits, but the stock was stagnant. Our analysis suggests that shareholders have noticed something concerning in the numbers.

View our latest analysis for Modiin Energy-Limited Partnership

A Closer Look At Modiin Energy-Limited Partnership's 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. The ratio shows us how much a company's profit exceeds its FCF.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Modiin Energy-Limited Partnership has an accrual ratio of 0.28 for the year to December 2023. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. Over the last year it actually had negative free cash flow of US$19m, in contrast to the aforementioned profit of US$2.12m. We also note that Modiin Energy-Limited Partnership's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of US$19m. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Modiin Energy-Limited Partnership.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, Modiin Energy-Limited Partnership increased the number of shares on issue by 18% 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. Check out Modiin Energy-Limited Partnership's historical EPS growth by clicking on this link.

A Look At The Impact Of Modiin Energy-Limited Partnership's Dilution On Its Earnings Per Share (EPS)

Three years ago, Modiin Energy-Limited Partnership lost money. Zooming in to the last year, we still can't talk about growth rates coherently, since it made a loss last year. But mathematics aside, it is always good to see when a formerly unprofitable business come good (though we accept profit would have been higher if dilution had not been required). Therefore, the dilution is having a noteworthy influence on shareholder returns.

If Modiin Energy-Limited Partnership's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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.

Our Take On Modiin Energy-Limited Partnership's Profit Performance

As it turns out, Modiin Energy-Limited Partnership couldn't match its profit with cashflow and its dilution means that shareholders own less of the company than the did before (unless they bought more shares). Considering all this we'd argue Modiin Energy-Limited Partnership's profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about Modiin Energy-Limited Partnership as a business, it's important to be aware of any risks it's facing. When we did our research, we found 5 warning signs for Modiin Energy-Limited Partnership (2 are a bit unpleasant!) that we believe deserve your full attention.

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 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.