Space-Communication (TLV:SCC) Strong Profits May Be Masking Some Underlying Issues
The recent earnings posted by Space-Communication Ltd (TLV:SCC) were solid, but the stock didn't move as much as we expected. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.
Examining Cashflow Against Space-Communication's Earnings
Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. The ratio shows us how much a company's profit exceeds its FCF.
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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
Space-Communication has an accrual ratio of -0.13 for the year to June 2026. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. In fact, it had free cash flow of US$57m in the last year, which was a lot more than its statutory profit of US$25.6m. Space-Communication's free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons. Having said that, there is more to consider. 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 Space-Communication
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Space-Communication.
In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Space-Communication expanded the number of shares on issue by 97% 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. You can see a chart of Space-Communication's EPS by clicking here.
How Is Dilution Impacting Space-Communication's Earnings Per Share (EPS)?
Three years ago, Space-Communication lost money. The good news is that profit was up 53% in the last twelve months. But EPS was less impressive, and was pretty much flat over that time. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.
In the long term, if Space-Communication's earnings per share can increase, then the share price should too. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. 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?
Surprisingly, given Space-Communication's accrual ratio implied strong cash conversion, its paper profit was actually boosted by US$20m in unusual items. 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. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that Space-Communication's positive unusual items were quite significant relative to its profit in the year to June 2026. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.
Our Take On Space-Communication's Profit Performance
Summing up, Space-Communication's accrual ratio suggests that its statutory earnings are well matched by cash flow while its unusual items boosted the profit in a way that might not be repeated. Meanwhile, the dilution was a negative for shareholders. For the reasons mentioned above, we think that a perfunctory glance at Space-Communication's statutory profits might make it look better than it really is on an underlying level. So while earnings quality is important, it's equally important to consider the risks facing Space-Communication at this point in time. When we did our research, we found 5 warning signs for Space-Communication (2 don't sit too well with us!) that we believe deserve your full attention.
Our examination of Space-Communication has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. But there are plenty of other ways to inform your opinion of a company. 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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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.