Shareholders didn't appear too concerned by Capital Clean Energy Carriers Corp.'s (NASDAQ:CCEC) weak earnings. We did some digging, and we believe that investors are missing some worrying factors underlying the profit figures.

See our latest analysis for Capital Clean Energy Carriers

A Closer Look At Capital Clean Energy Carriers' 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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. 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 September 2024, Capital Clean Energy Carriers recorded an accrual ratio of 0.41. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of US$11.8m, a look at free cash flow indicates it actually burnt through US$982m in the last year. We also note that Capital Clean Energy Carriers' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of US$982m. Notably, the company has issued new shares, thus diluting existing shareholders and reducing 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, Capital Clean Energy Carriers issued 193% more new shares over the last year. As a result, its net income is now split between 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 Capital Clean Energy Carriers' historical EPS growth by clicking on this link.

How Is Dilution Impacting Capital Clean Energy Carriers' Earnings Per Share (EPS)?

Capital Clean Energy Carriers' net profit dropped by 81% per year over the last three years. Even looking at the last year, profit was still down 78%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 91% in the same period. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

If Capital Clean Energy Carriers' EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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 Capital Clean Energy Carriers' Profit Performance

As it turns out, Capital Clean Energy Carriers couldn't match its profit with cashflow and its dilution means that shareholders own less of the company than the did before (unless they bought more shares). On reflection, the above-mentioned factors give us the strong impression that Capital Clean Energy Carriers'underlying earnings power is not as good as it might seem, based on the statutory profit numbers. If you want to do dive deeper into Capital Clean Energy Carriers, you'd also look into what risks it is currently facing. When we did our research, we found 5 warning signs for Capital Clean Energy Carriers (4 are concerning!) that we believe deserve your full attention.

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. Some people consider a high return on equity to be a good sign of a quality business. 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.

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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.