Shareholders Shouldn’t Be Too Comfortable With Y.H. Dimri Construction & Development's (TLV:DIMRI) Strong Earnings

Despite posting strong earnings, Y.H. Dimri Construction & Development Ltd's (TLV:DIMRI) stock didn't move much over the last week. We think that investors might be worried about the foundations the earnings are built on.

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Zooming In On Y.H. Dimri Construction & Development's 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. 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.

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

For the year to December 2024, Y.H. Dimri Construction & Development had an accrual ratio of 0.26. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Over the last year it actually had negative free cash flow of ₪1.0b, in contrast to the aforementioned profit of ₪528.4m. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of ₪1.0b, this year, indicates high risk. However, that's not the end of the story. We must also consider the impact of unusual items on statutory profit (and thus the accrual ratio), as well as note the ramifications of the company issuing new shares.

See our latest analysis for Y.H. Dimri Construction & Development

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Y.H. Dimri Construction & Development.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Y.H. Dimri Construction & Development issued 9.8% more new shares over the last year. 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 Y.H. Dimri Construction & Development's historical EPS growth by clicking on this link.

A Look At The Impact Of Y.H. Dimri Construction & Development's Dilution On Its Earnings Per Share (EPS)

Y.H. Dimri Construction & Development has improved its profit over the last three years, with an annualized gain of 46% in that time. And the 113% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 103% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Y.H. Dimri Construction & Development can grow EPS persistently. 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.

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that Y.H. Dimri Construction & Development's profit was boosted by unusual items worth ₪122m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And that's as you'd expect, given these boosts are described as 'unusual'. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Y.H. Dimri Construction & Development's Profit Performance

In conclusion, Y.H. Dimri Construction & Development's weak accrual ratio suggested its statutory earnings have been inflated by the unusual items. Meanwhile, the new shares issued mean that shareholders now own less of the company, unless they tipped in more cash themselves. Considering all this we'd argue Y.H. Dimri Construction & Development's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into Y.H. Dimri Construction & Development, you'd also look into what risks it is currently facing. To help with this, we've discovered 3 warning signs (2 make us uncomfortable!) that you ought to be aware of before buying any shares in Y.H. Dimri Construction & Development.

Our examination of Y.H. Dimri Construction & Development 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.