We Think You Can Look Beyond Reach Subsea's (OB:REACH) Lackluster Earnings

Reach Subsea ASA's (OB:REACH) earnings announcement last week didn't impress shareholders. However, our analysis suggests that the soft headline numbers are getting counterbalanced by some positive underlying factors.

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Examining Cashflow Against Reach Subsea'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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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".

Over the twelve months to September 2025, Reach Subsea recorded an accrual ratio of -0.43. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of kr684m in the last year, which was a lot more than its statutory profit of kr187.4m. Reach Subsea did see its free cash flow drop year on year, which is less than ideal, like a Simpson's episode without Groundskeeper Willie. 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 Reach Subsea.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Reach Subsea increased the number of shares on issue by 20% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. 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 Reach Subsea's historical EPS growth by clicking on this link.

A Look At The Impact Of Reach Subsea's Dilution On Its Earnings Per Share (EPS)

Reach Subsea has improved its profit over the last three years, with an annualized gain of 127% in that time. Net profit actually dropped by 22% in the last year. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 1.1%. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, if Reach Subsea's earnings per share can increase, then the share price should too. 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 Reach Subsea's Profit Performance

In conclusion, Reach Subsea 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. Based on these factors, we think that Reach Subsea's profits are a reasonably conservative guide to its underlying profitability. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. At Simply Wall St, we found 2 warning signs for Reach Subsea and we think they deserve your attention.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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.