The Strong Earnings Posted By SNT Energy (KRX:100840) Are A Good Indication Of The Strength Of The Business

The subdued stock price reaction suggests that SNT Energy Co., Ltd.'s (KRX:100840) strong earnings didn't offer any surprises. We think that investors have missed some encouraging factors underlying the profit figures.

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A Closer Look At SNT Energy's 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to March 2025, SNT Energy had an accrual ratio of -0.43. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of ₩125b, well over the ₩34.7b it reported in profit. Given that SNT Energy had negative free cash flow in the prior corresponding period, the trailing twelve month resul of ₩125b would seem to be a step in the right direction. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, SNT Energy issued 10% more new shares over the last year. That means its earnings are split among 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 SNT Energy's EPS by clicking here.

How Is Dilution Impacting SNT Energy's Earnings Per Share (EPS)?

SNT Energy has improved its profit over the last three years, with an annualized gain of 900% in that time. But EPS was only up 873% per year, in the exact same period. And at a glance the 48% gain in profit over the last year impresses. But in comparison, EPS only increased by 48% over the same period. So you can see that the dilution has had a bit of an impact on shareholders.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if SNT Energy 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.

Our Take On SNT Energy's Profit Performance

At the end of the day, SNT Energy is diluting shareholders which will dampen earnings per share growth, but its accrual ratio showed it can back up its profits with free cash flow. Considering all the aforementioned, we'd venture that SNT Energy's profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. If you want to do dive deeper into SNT Energy, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 1 warning sign for SNT Energy and you'll want to know about this.

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