Robust earnings may not tell the whole story of New Fortress Energy (NASDAQ:NFE)

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New Fortress Energy Inc. (NASDAQ:NFE) stock was strong after reporting strong earnings. We have done some analysis and think investors are missing the details hidden under the earnings numbers.

Check out our latest analysis for New Fortress Energy

NasdaqGS: NFE Earnings and Revenue History March 8, 2022

Review of cash flow versus earnings of New Fortress Energy

As finance nerds already know, the cash flow equalization ratio is a key metric for assessing how well a company’s free cash flow (FCF) matches its earnings. To get the strike ratio, we first subtract FCF from earnings for a period and then divide that number by the average operating assets for the period. You can think of the cash flow equalization ratio as the “non-FCF profit ratio”.

Therefore, a negative accrual ratio is positive for the company and a positive accrual ratio is negative. While having a accrual ratio greater than zero is of little concern, we believe it is worth noting when a company has a relatively high accrual ratio. Indeed, some academic studies have suggested that high accrual ratios tend to lead to lower earnings or less earnings growth.

In the twelve months to December 2021, New Fortress Energy recorded a accrual ratio of 0.20. We can therefore deduce that its free cash flow is much lower than the coverage of its statutory profit. In the past year, he had actually negative free cash flow of US$585 million, as opposed to the aforementioned profit of US$97.1 million. We also note that New Fortress Energy’s free cash flow was also negative last year, so we could understand if shareholders were bothered by its US$585 million outflow. That said, there is more to consider. We also need to consider the impact of unusual items on statutory profit (and therefore the accrual rate), as well as note the ramifications of the company issuing new shares.

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.

A key aspect of assessing the quality of earnings is looking at how much a company is diluting its shareholders. It just so happens that New Fortress Energy has issued 18% more new shares over the past year. Therefore, each stock now receives a smaller portion of the profits. 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. You can see a chart of New Fortress Energy’s EPS by clicking here.

A look at the impact of New Fortress Energy’s dilution on its earnings per share (EPS).

Three years ago, New Fortress Energy lost money. Zooming in on last year, we still can’t talk about growth rate consistently because it made a loss last year. But math aside, it’s always good to see when a once unprofitable business turns good (although we accept that the profit would have been higher had the dilution not been necessary). So you can see that the dilution had a bit of an impact on the shareholders.

In the long term, if the profits of New Fortress Energy per share may rise, the stock price should also rise. However, if its earnings increase while its earnings per share remain stable (or even decline), shareholders might not see much benefit. For the ordinary retail shareholder, EPS is an excellent metric to verify your hypothetical “share” of company earnings.

How do unusual items affect earnings?

Unfortunately (in the short term), New Fortress Energy saw its earnings reduced by unusual items worth $47 million. If it was a non-cash charge, it would have been easier to have a high cash conversion, so it’s surprising that the accrual ratio tells a different story. While deductions due to unusual items are disappointing at first, there is a silver lining. When we analyzed the vast majority of listed companies around the world, we found that material unusual items are often not repeated. And that’s no surprise given that these line items are considered unusual. If New Fortress Energy does not see a repeat of these unusual expenses, all other things being equal, we expect its earnings to increase in the coming year.

Our view on New Fortress Energy’s earnings performance

In conclusion, New Fortress Energy’s accrual ratio suggests that its statutory earnings are not supported by cash flow; but the fact that unusual items actually weigh on earnings can create an advantage if these unusual items do not recur. And dilution means earnings per share are lower than the bottom line might imply. Based on these factors, we think New Fortress Energy’s statutory earnings likely make it look better than it does at an underlying level. In light of this, if you want to do more analysis on the company, it is essential to be aware of the risks involved. To do this, you need to find out about the 4 warning signs we spotted some with New Fortress Energy (including 2 potentially serious ones).

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’s always more to discover if you’re able to focus on the details. 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.

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.

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