Enlight Renewable Energy Ltd's (TLV:ENLT) recent weak earnings report didn't cause a big stock movement. However, we believe that investors should be aware of some underlying factors which may be of concern.
A Closer Look At Enlight Renewable Energy'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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.
Enlight Renewable Energy has an accrual ratio of 0.36 for the year to September 2026. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. Even though it reported a profit of US$97.2m, a look at free cash flow indicates it actually burnt through US$2.4b in the last year. We also note that Enlight Renewable Energy's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of US$2.4b. Unfortunately for shareholders, the company has also been issuing new shares, diluting 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.
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Enlight Renewable Energy issued 6.1% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. 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 Enlight Renewable Energy's historical EPS growth by clicking on this link.
How Is Dilution Impacting Enlight Renewable Energy's Earnings Per Share (EPS)?
As you can see above, Enlight Renewable Energy has been growing its net income over the last few years, with an annualized gain of 46% over three years. But EPS was only up 19% per year, in the exact same period. Net income was down 21% over the last twelve months. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 30%. Therefore, the dilution is having a noteworthy influence on shareholder returns.
In the long term, if Enlight Renewable Energy'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 Enlight Renewable Energy's Profit Performance
In conclusion, Enlight Renewable Energy has weak cashflow relative to earnings, which indicates lower quality earnings, and the dilution means that shareholders now own a smaller proportion of the company (assuming they maintained the same number of shares). Considering all this we'd argue Enlight Renewable Energy's profits probably give an overly generous impression of its sustainable level of profitability. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. To help with this, we've discovered 4 warning signs (2 are a bit concerning!) that you ought to be aware of before buying any shares in Enlight Renewable Energy.
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 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 with significant insider holdings to be useful.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.