We Think Lungteh Shipbuilding's (TWSE:6753) Profit Is Only A Baseline For What They Can Achieve

When companies post strong earnings, the stock generally performs well, just like Lungteh Shipbuilding Co., Ltd.'s (TWSE:6753) stock has recently. We have done some analysis, and we found several positive factors beyond the profit numbers.

Check out our latest analysis for Lungteh Shipbuilding

Zooming In On Lungteh Shipbuilding's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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. 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. 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, Lungteh Shipbuilding recorded an accrual ratio of -0.84. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of NT$2.3b during the period, dwarfing its reported profit of NT$575.0m. Lungteh Shipbuilding shareholders are no doubt pleased that free cash flow improved over the last twelve months. 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 Lungteh Shipbuilding.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, Lungteh Shipbuilding issued 9.9% 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. Check out Lungteh Shipbuilding's historical EPS growth by clicking on this link.

How Is Dilution Impacting Lungteh Shipbuilding's Earnings Per Share (EPS)?

As you can see above, Lungteh Shipbuilding has been growing its net income over the last few years, with an annualized gain of 301% over three years. But EPS was only up 231% per year, in the exact same period. And the 100% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 85% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, earnings per share growth should beget share price growth. So Lungteh Shipbuilding 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 Lungteh Shipbuilding's Profit Performance

At the end of the day, Lungteh Shipbuilding 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. Based on these factors, we think that Lungteh Shipbuilding's profits are a reasonably conservative guide to its underlying profitability. If you'd like to know more about Lungteh Shipbuilding as a business, it's important to be aware of any risks it's facing. For example - Lungteh Shipbuilding has 2 warning signs we think you should be aware of.

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 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.