Energy International Investments Holdings' (HKG:353) Weak Earnings May Only Reveal A Part Of The Whole Picture

Investors weren't pleased with the recent soft earnings report from Energy International Investments Holdings Limited (HKG:353). Our analysis suggests that while the headline numbers were soft, there are some positive factors which shareholders may have missed.

See our latest analysis for Energy International Investments Holdings

A Closer Look At Energy International Investments Holdings' Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.

Over the twelve months to March 2024, Energy International Investments Holdings recorded an accrual ratio of -0.20. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of HK$344m during the period, dwarfing its reported profit of HK$51.8m. Energy International Investments Holdings' free cash flow improved over the last year, which is generally good to see. Unfortunately for shareholders, the company has also been issuing new shares, diluting 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 Energy International Investments Holdings.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Energy International Investments Holdings increased the number of shares on issue by 50% over the last twelve months by issuing new shares. That means its earnings are split among 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 Energy International Investments Holdings' EPS by clicking here.

A Look At The Impact Of Energy International Investments Holdings' Dilution On Its Earnings Per Share (EPS)

As you can see above, Energy International Investments Holdings has been growing its net income over the last few years, with an annualized gain of 863% over three years. But EPS was only up 645% per year, in the exact same period. Net profit actually dropped by 42% in the last year. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 55%. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

If Energy International Investments Holdings' EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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.

Our Take On Energy International Investments Holdings' Profit Performance

In conclusion, Energy International Investments Holdings 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. Given the contrasting considerations, we don't have a strong view as to whether Energy International Investments Holdings's profits are an apt reflection of its underlying potential for profit. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Every company has risks, and we've spotted 3 warning signs for Energy International Investments Holdings (of which 1 is concerning!) you should know about.

Our examination of Energy International Investments Holdings has focussed on certain factors that can make its earnings look better than they are. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com