Dampskibsselskabet Norden (CPH:DNORD) Posted Weak Earnings But There Is More To Worry About

Investors were disappointed with Dampskibsselskabet Norden A/S' (CPH:DNORD) recent earnings. We think that they may have more to worry about than just soft profit numbers.

View our latest analysis for Dampskibsselskabet Norden

A Closer Look At Dampskibsselskabet Norden'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Dampskibsselskabet Norden has an accrual ratio of 0.24 for the year to December 2024. Unfortunately, that means its free cash flow fell significantly short of its reported profits. In the last twelve months it actually had negative free cash flow, with an outflow of US$56m despite its profit of US$162.7m, mentioned above. It's worth noting that Dampskibsselskabet Norden generated positive FCF of US$321m a year ago, so at least they've done it in the past. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Dampskibsselskabet Norden.

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that Dampskibsselskabet Norden's profit was boosted by unusual items worth US$83m 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. Which is hardly surprising, given the name. Dampskibsselskabet Norden had a rather significant contribution from unusual items relative to its profit to December 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Dampskibsselskabet Norden's Profit Performance

Summing up, Dampskibsselskabet Norden received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. Considering all this we'd argue Dampskibsselskabet Norden's profits probably give an overly generous impression of its sustainable level of profitability. So while earnings quality is important, it's equally important to consider the risks facing Dampskibsselskabet Norden at this point in time. For example, we've found that Dampskibsselskabet Norden has 3 warning signs (1 is a bit unpleasant!) that deserve your attention before going any further with your analysis.

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. Some people consider a high return on equity to be a good sign of a quality business. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.