Is There More To The Story Than Da-Cin ConstructionLtd's (TPE:2535) Earnings Growth?

Broadly speaking, profitable businesses are less risky than unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. Today we'll focus on whether this year's statutory profits are a good guide to understanding Da-Cin ConstructionLtd (TPE:2535).

While Da-Cin ConstructionLtd was able to generate revenue of NT$13.7b in the last twelve months, we think its profit result of NT$934.5m was more important. One positive is that it has grown both its profit and its revenue, over the last few years.

Check out our latest analysis for Da-Cin ConstructionLtd

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. So today we'll examine what Da-Cin ConstructionLtd's cashflow and its expanding share count tell us about the nature of its profits. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Da-Cin ConstructionLtd.

Examining Cashflow Against Da-Cin ConstructionLtd'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. The ratio shows us how much a company's profit exceeds its FCF.

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

Da-Cin ConstructionLtd has an accrual ratio of -0.15 for the year to September 2020. 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 NT$1.8b, well over the NT$934.5m it reported in profit. Given that Da-Cin ConstructionLtd had negative free cash flow in the prior corresponding period, the trailing twelve month resul of NT$1.8b 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.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Da-Cin ConstructionLtd expanded the number of shares on issue by 11% 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 Da-Cin ConstructionLtd's EPS by clicking here.

How Is Dilution Impacting Da-Cin ConstructionLtd's Earnings Per Share? (EPS)

Da-Cin ConstructionLtd has improved its profit over the last three years, with an annualized gain of 61% in that time. In comparison, earnings per share only gained 13% over the same period. And at a glance the 64% gain in profit over the last year impresses. But in comparison, EPS only increased by 46% over the same period. So you can see that the dilution has had a bit of an impact on shareholders. Therefore, the dilution is having a noteworthy influence on shareholder returns. And so, you can see quite clearly that dilution is influencing shareholder earnings.

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 Da-Cin ConstructionLtd can grow EPS persistently. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

Our Take On Da-Cin ConstructionLtd's Profit Performance

At the end of the day, Da-Cin ConstructionLtd 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 the aforementioned, we think that Da-Cin ConstructionLtd's profits are probably a reasonable reflection of its underlying profitability; although we'd be confident in that conclusion if we saw a cleaner set of results. If you'd like to know more about Da-Cin ConstructionLtd as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 2 warning signs for Da-Cin ConstructionLtd you should know about.

Our examination of Da-Cin ConstructionLtd 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. 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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.

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This article by Simply Wall St is general in nature. 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.
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