Despite strong earnings, the market for Pathfinder Resources Ltd (ASX:PF1) the stock hasn’t moved much. Our analysis suggests that this could be due to shareholders noticing some underlying factors of concern.
See our latest analysis for Pathfinder Resources
Pathfinder Resources Cash Flow vs Earnings Review
A key financial ratio used to measure a company’s ability to convert earnings into free cash flow (FCF) is the exercise ratio. The strike 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 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. Notably, there is academic evidence that suggests a high exercise ratio is a bad sign for short-term profits, generally speaking.
For the year to December 2021, Pathfinder Resources had an accrual ratio of 1.39. Typically, this bodes ill for future profitability. Namely, the company did not generate a single penny of free cash flow during this period. In the past twelve months, he had actually negative free cash flow, with an outflow of A$2.5 million despite its A$4.28 million profit, mentioned above. After negative free cash flow last year, we imagine some shareholders might wonder whether its cash burn of A$2.5 million this year indicates high risk.
To note: we always recommend that investors check the strength of the balance sheet. Click here to access our analysis of Pathfinder Resources’ balance sheet.
Our view on the earnings performance of Pathfinder Resources
As we’ve made very clear, we’re a bit worried that Pathfinder Resources didn’t support last year’s earnings with free cash flow. For this reason, we believe that Pathfinder Resources’ statutory earnings may be a poor indicator of its underlying earning power and could give investors an overly positive impression of the company. The good news is that it has made a profit in the last twelve months, despite its previous loss. Ultimately, it is essential to consider more than the above factors, if you want to fully understand the business. 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 help you, we found 4 warning signs (2 are a little nasty!) that you should be aware of before buying stocks in Pathfinder Resources.
Today, we zoomed in on a single data point to better understand the nature of Pathfinder Resources’ earnings. But there’s always more to discover if you’re able to focus on the details. For example, many people view a high return on equity as an indication of a favorable trading economy, while others like to “follow the money” and look for stocks that insiders are buying. 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.