We Think Shareholders Should Be Aware Of Some Factors Beyond Remor Solar Polska's (WSE:RSP) Profit

After announcing healthy earnings, Remor Solar Polska S.A.'s (WSE:RSP) stock rose over the last week. While the headline numbers were strong, we found some underlying problems once we started looking at what drove earnings.

View our latest analysis for Remor Solar Polska

A Closer Look At Remor Solar Polska's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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.

For the year to December 2022, Remor Solar Polska had an accrual ratio of 0.39. Ergo, its free cash flow is significantly weaker than its profit. As a general rule, that bodes poorly for future profitability. Indeed, in the last twelve months it reported free cash flow of zł1.4m, which is significantly less than its profit of zł6.76m. Given that Remor Solar Polska had negative free cash flow in the prior corresponding period, the trailing twelve month resul of zł1.4m 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Remor Solar Polska.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Remor Solar Polska issued 27% 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 Remor Solar Polska's historical EPS growth by clicking on this link.

A Look At The Impact Of Remor Solar Polska's Dilution On Its Earnings Per Share (EPS)

Remor Solar Polska has improved its profit over the last three years, with an annualized gain of 7,882% in that time. In comparison, earnings per share only gained 4,119% over the same period. And the 526% profit boost in the last year certainly seems impressive at first glance. But in comparison, EPS only increased by 394% over the same period. So you can see that the dilution has had a fairly significant impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So Remor Solar Polska shareholders will want to see that EPS figure continue to increase. 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 Remor Solar Polska's Profit Performance

As it turns out, Remor Solar Polska couldn't match its profit with cashflow and its dilution means that earnings per share growth is lagging net income growth. Considering all this we'd argue Remor Solar Polska's profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about Remor Solar Polska as a business, it's important to be aware of any risks it's facing. For instance, we've identified 4 warning signs for Remor Solar Polska (1 is a bit unpleasant) you should be familiar with.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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 that insiders are buying.

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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.