Despite excellent results, Grand Venture Technology Limited (SGX:JLB) The stock hasn’t moved much over the past week. We decided to deepen our analysis and we believe that investors might be concerned about several worrying factors that we have discovered.
See our latest analysis for Grand Venture Technology
Grand Venture Technology Cash Flow vs Earnings Review
In high finance, the key ratio used to measure a company’s ability to convert reported earnings to free cash flow (FCF) is the exercise ratio (cash). Put simply, this ratio subtracts FCF from net income 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.
This means that a negative accrual ratio is a good thing because it shows that the company is generating more free cash flow than its earnings suggest. While it’s fine to have a positive accrual ratio, indicating some level of non-monetary benefits, a high accrual ratio is arguably a bad thing, as it indicates that the earnings on paper do not match the cash flow. Indeed, some academic studies have suggested that high accrual ratios tend to lead to lower earnings or less earnings growth.
For the year to December 2021, Grand Venture Technology had a accrual ratio of 0.35. We can therefore deduce that its free cash flow was well below covering its statutory profit, suggesting that one should perhaps think twice before putting much weight on the latter. Although he reported a profit of S$17.6 million, an examination of free cash flow indicates that he actually spent S$13 million in the past year. After negative free cash flow last year, we imagine some shareholders might question whether its cash burn of S$13 million this year indicates high risk. Unfortunately for shareholders, the company also issued new shares, diluting their share of future earnings.
This might make you wonder what analysts predict in terms of future profitability. Luckily, you can click here to see an interactive chart outlining future profitability, based on their estimates.
In order to understand the potential return per share, it is essential to consider how much a company dilutes shareholders. It turns out that Grand Venture Technology has issued 42% more new shares over the past year. As a result, his net income is now spread across a larger number of shares. Talking about net profit, without noticing earnings per share, is being distracted by the big numbers while ignoring the small numbers that speak to per share assess. Learn about the historic growth of Grand Venture Technology’s EPS by clicking this link.
What is the impact of dilution on Grand Venture Technology’s earnings per share? (EPS)
Grand Venture Technology has improved its earnings over the past three years, with an annualized gain of 275% over that period. In comparison, the gains per share gained only 121% over the same period. And the 237% increase in profits over the past year certainly seems impressive at first glance. On the other hand, earnings per share increased by only 164% during this period. So you see that the dilution had a pretty big impact on the shareholders.
Changes in share price tend to reflect changes in earnings per share, over the long term. So Grand Venture Technology shareholders will want to see that EPS figure continue to grow. However, if its earnings increase while its earnings per share remain stable (or even decline), shareholders might not see much benefit. For this reason, one could argue that EPS is more important than long-term net income, assuming the goal is to gauge whether a company’s stock price can rise.
Our view on Grand Venture Technology’s earnings performance
In conclusion, Grand Venture Technology has low cash flow to earnings, indicating lower quality earnings, and dilution means that its earnings per share growth is lower than its earnings growth. Considering all of this, we’d say Grand Venture Technology’s earnings probably give an overly generous impression of its level of sustainable profitability. Keep in mind that when it comes to analyzing a stock, the risks involved should be noted. For example, we have identified 3 Warning Signs for Grand Venture Technology (1 is concerning) that you should know about.
In this article, we’ve looked at a number of factors that can detract from the usefulness of profit numbers, and came out cautious. But there are many other ways to inform your opinion about a company. Some people consider a high return on equity to be a good sign of a quality company. Although it might take a bit of research on your behalf, you might find this free collection of companies offering a high return on equity, or this list of stocks that insiders buy to be useful.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.