Some Investors May Be Willing To Look Past Ibersol S.G.P.S' (ELI:IBS) Soft Earnings

Soft earnings didn't appear to concern Ibersol, S.G.P.S., S.A.'s (ELI:IBS) shareholders over the last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

Check out our latest analysis for Ibersol S.G.P.S

Zooming In On Ibersol S.G.P.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. 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. 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 December 2023, Ibersol S.G.P.S recorded an accrual ratio of -0.12. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of €39m in the last year, which was a lot more than its statutory profit of €14.7m. Ibersol S.G.P.S 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.

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.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Ibersol S.G.P.S expanded the number of shares on issue by 7.6% over the last year. That means its earnings are split among a greater number of shares. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. You can see a chart of Ibersol S.G.P.S' EPS by clicking here.

How Is Dilution Impacting Ibersol S.G.P.S' Earnings Per Share (EPS)?

Ibersol S.G.P.S was losing money three years ago. And even focusing only on the last twelve months, we see profit is down 12%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 18% in the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

If Ibersol S.G.P.S' EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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 Ibersol S.G.P.S' Profit Performance

In conclusion, Ibersol S.G.P.S 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. Given the contrasting considerations, we don't have a strong view as to whether Ibersol S.G.P.S's profits are an apt reflection of its underlying potential for profit. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. At Simply Wall St, we found 2 warning signs for Ibersol S.G.P.S and we think they deserve your attention.

Our examination of Ibersol S.G.P.S has focussed on certain factors that can make its earnings look better than they are. 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.