Investors were disappointed with the weak earnings posted by Gildan Activewear Inc. (TSE:GIL ). While the headline numbers were soft, we believe that investors might be missing some encouraging factors.
Zooming In On Gildan Activewear'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. 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 September 2026, Gildan Activewear had an accrual ratio of -0.11. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. To wit, it produced free cash flow of US$927m during the period, dwarfing its reported profit of US$339.6m. Gildan Activewear's free cash flow improved over the last year, which is generally good to see. However, that's not the end of the story. We can look at how unusual items in the profit and loss statement impacted its accrual ratio, as well as explore how dilution is impacting shareholders negatively.
Check out our latest analysis for Gildan Activewear
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, Gildan Activewear issued 24% 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 Gildan Activewear's historical EPS growth by clicking on this link.
A Look At The Impact Of Gildan Activewear's Dilution On Its Earnings Per Share (EPS)
Unfortunately, Gildan Activewear's profit is down 27% per year over three years. And even focusing only on the last twelve months, we see profit is down 29%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 39% in the same period. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.
If Gildan Activewear's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. 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.
How Do Unusual Items Influence Profit?
Gildan Activewear's profit was reduced by unusual items worth US$306m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. This is what you'd expect to see where a company has a non-cash charge reducing paper profits. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. If Gildan Activewear doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.
Our Take On Gildan Activewear's Profit Performance
In conclusion, both Gildan Activewear's accrual ratio and its unusual items suggest that its statutory earnings are probably reasonably conservative, but the dilution means that per-share performance is weaker than the statutory profit numbers imply. Looking at all these factors, we'd say that Gildan Activewear's underlying earnings power is at least as good as the statutory numbers would make it seem. If you'd like to know more about Gildan Activewear as a business, it's important to be aware of any risks it's facing. For example, we've discovered 5 warning signs that you should run your eye over to get a better picture of Gildan Activewear.
After our examination into the nature of Gildan Activewear's profit, we've come away optimistic for the company. 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 with high insider ownership.
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