There May Be Reason For Hope In Bridgemarq Real Estate Services' (TSE:BRE) Disappointing Earnings

Shareholders appeared unconcerned with Bridgemarq Real Estate Services Inc.'s (TSE:BRE) lackluster earnings report last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

Check out our latest analysis for Bridgemarq Real Estate Services

Examining Cashflow Against Bridgemarq Real Estate Services' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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 December 2023, Bridgemarq Real Estate Services had an accrual ratio of -1.17. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of CA$13m in the last year, which was a lot more than its statutory profit of CA$4.00m. Bridgemarq Real Estate Services' free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons. 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 Bridgemarq Real Estate Services.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Bridgemarq Real Estate Services increased the number of shares on issue by 23% over the last twelve months by issuing new shares. As a result, its net income is now split between a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. You can see a chart of Bridgemarq Real Estate Services' EPS by clicking here.

How Is Dilution Impacting Bridgemarq Real Estate Services' Earnings Per Share (EPS)?

As you can see above, Bridgemarq Real Estate Services has been growing its net income over the last few years, with an annualized gain of 421% over three years. Net profit actually dropped by 81% in the last year. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 81%. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, if Bridgemarq Real Estate Services' 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.

Our Take On Bridgemarq Real Estate Services' Profit Performance

In conclusion, Bridgemarq Real Estate Services has a strong cashflow relative to earnings, which indicates good quality earnings, but the dilution means its earnings per share are dropping faster than its profit. Considering all the aforementioned, we'd venture that Bridgemarq Real Estate Services' profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. So while earnings quality is important, it's equally important to consider the risks facing Bridgemarq Real Estate Services at this point in time. When we did our research, we found 6 warning signs for Bridgemarq Real Estate Services (4 don't sit too well with us!) 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, as a guide to a business. But there are plenty of other ways to inform your opinion of a company. 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 that insiders are buying 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.