Navitas Petroleum Limited Partnership's (TLV:NVPT) Anemic Earnings Might Be Worse Than You Think

The market rallied behind Navitas Petroleum, Limited Partnership's (TLV:NVPT) stock, leading do a rise in the share price after its recent weak earnings report. Sometimes, shareholders are willing to ignore soft numbers with the hope that they will improve, but our analysis suggests this is unlikely for Navitas Petroleum Limited Partnership.

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A Closer Look At Navitas Petroleum 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.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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. 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 2024, Navitas Petroleum Limited Partnership had an accrual ratio of 0.27. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. In the last twelve months it actually had negative free cash flow, with an outflow of US$304m despite its profit of US$1.42m, mentioned above. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of US$304m, this year, indicates high risk. 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 Navitas Petroleum Limited Partnership.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Navitas Petroleum Limited Partnership expanded the number of shares on issue by 7.3% over the last year. Therefore, each share now receives a smaller portion of profit. 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. Check out Navitas Petroleum Limited Partnership's historical EPS growth by clicking on this link.

A Look At The Impact Of Navitas Petroleum Limited Partnership's Dilution On Its Earnings Per Share (EPS)

Unfortunately, Navitas Petroleum Limited Partnership's profit is down 64% per year over three years. Even looking at the last year, profit was still down 90%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 91% in the same period. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, if Navitas Petroleum Limited Partnership's 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 the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On Navitas Petroleum Limited Partnership's Profit Performance

As it turns out, Navitas Petroleum 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 Navitas Petroleum Limited Partnership's profits probably give an overly generous impression of its sustainable level of profitability. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example, Navitas Petroleum Limited Partnership has 3 warning signs (and 2 which shouldn't be ignored) we think you should know about.

Our examination of Navitas Petroleum Limited Partnership has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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.