After announcing weak earnings, Solaris Energy Infrastructure, Inc.'s (NYSE:SEI) stock was strong. While shares were up, we believe there are some factors in the earnings report that might cause investors some concerns.
NYSE:SEI Earnings and Revenue History February 28th 2025
Zooming In On Solaris Energy Infrastructure's Earnings
In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
For the year to December 2024, Solaris Energy Infrastructure had an accrual ratio of 0.24. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. Even though it reported a profit of US$14.8m, a look at free cash flow indicates it actually burnt through US$129m in the last year. It's worth noting that Solaris Energy Infrastructure generated positive FCF of US$26m a year ago, so at least they've done it in the past. 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. One positive for Solaris Energy Infrastructure shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. As a result, some shareholders may be looking for stronger cash conversion in the current year.
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.
In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Solaris Energy Infrastructure increased the number of shares on issue by 56% over the last twelve months by issuing new shares. That means its earnings are split among 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. You can see a chart of Solaris Energy Infrastructure's EPS by clicking here.
A Look At The Impact Of Solaris Energy Infrastructure's Dilution On Its Earnings Per Share (EPS)
Solaris Energy Infrastructure was losing money three years ago. And even focusing only on the last twelve months, we see profit is down 36%. Sadly, earnings per share fell further, down a full 34% in that time. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.
If Solaris Energy Infrastructure's 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.
How Do Unusual Items Influence Profit?
The fact that the company had unusual items boosting profit by US$7.7m, in the last year, probably goes some way to explain why its accrual ratio was so weak. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. If Solaris Energy Infrastructure doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.
Our Take On Solaris Energy Infrastructure's Profit Performance
Solaris Energy Infrastructure didn't back up its earnings with free cashflow, but this isn't too surprising given profits were inflated by unusual items. Meanwhile, the new shares issued mean that shareholders now own less of the company, unless they tipped in more cash themselves. For all the reasons mentioned above, we think that, at a glance, Solaris Energy Infrastructure's statutory profits could be considered to be low quality, because they are likely to give investors an overly positive impression of the company. If you'd like to know more about Solaris Energy Infrastructure as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 5 warning signs we've spotted with Solaris Energy Infrastructure (including 3 which are potentially serious).
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 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. 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.
