We have not seen Platige Image SA (WSE:PLI) stocks surged when they recently reported strong earnings. We decided to deepen our analysis and we believe that investors might be concerned about several worrying factors that we have discovered.
See our latest analysis for Platige Image
Focus on Platige Image revenues
In high finance, the key ratio used to measure a company’s ability to convert reported earnings into free cash flow (FCF) is the exercise ratio (cash). 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. This ratio tells us how much of a company’s profit is not backed by free cash flow.
Therefore, a negative accrual ratio is positive for the company and a positive accrual ratio is negative. That’s not to say we should worry about a positive accumulation ratio, but it’s worth noting where the accumulation ratio is rather high. Indeed, some academic studies have suggested that high accrual ratios tend to lead to lower earnings or less earnings growth.
For the year to March 2022, Platige Image had a accrual ratio of 0.28. Therefore, we know that his free cash flow was significantly lower than his statutory profit, which raises questions about the real usefulness of this profit figure. In the last year he had actually negative free cash flow of 2.4 million zł, in contrast to the aforementioned profit of 6.67 million zł. We also note that Platige Image’s free cash flow was also negative last year, so we could understand if shareholders were bothered by its zł2.4 million outflow. However, this is not the end of the story. We can examine the impact of unusual income statement items on its accrual ratio, as well as the negative impact of dilution on shareholders.
To note: we always recommend that investors check the strength of the balance sheet. Click here to be redirected to our analysis of Platige Image’s balance sheet.
In order to understand the potential return per share, it is essential to consider how much a company dilutes shareholders. In this case, Platige Image has issued 9.1% more new shares over the past year. This means that its profits are distributed among a larger number of shares. Celebrating net income while ignoring dilution is like rejoicing that you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into multiple slices. You can see a chart of Platige Image’s EPS by clicking here.
What is the impact of dilution on Platige Image’s earnings per share? (EPS)
Platige Image was losing money three years ago. On the bright side, over the last twelve months, it has increased its profits by 167%. On the other hand, earnings per share only increased by 142% over the same period. So you can see that the dilution had a bit of an impact on the shareholders.
Changes in share price tend to reflect changes in earnings per share, over the long term. So it will definitely be a shareholder benefit if Platige Image can grow EPS persistently. 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 profits?
Given the exercise ratio, it’s not too surprising that Platige Image’s profit was boosted by unusual items worth zł 1.6 million over the past twelve months. While we like to see increases in earnings, we tend to be a bit more cautious when unusual items have made a big contribution. We have analyzed the figures of most publicly traded companies around the world, and it is very common for unusual items to be unique in nature. Which is hardly surprising, given the name. Assuming these unusual items do not reoccur in the current year, we would therefore expect earnings to be weaker next year (in the absence of business growth, i.e. ).
Our view on Platige Image’s earnings performance
Platige Image didn’t support earnings with free cash flow, but that’s not too surprising given earnings were inflated by unusual items. Meanwhile, new shares issued mean that shareholders now own less of the company, unless they themselves contribute more cash. For the reasons mentioned above, we believe that a cursory glance at Platige Image’s statutory earnings might make it look better than it actually is on an underlying level. So while the quality of the benefits is important, it is equally important to consider the risks that Platige Image faces at this stage. For example, we have identified 3 Warning Signs for Platige Image (1 is a bit obnoxious) that you should know.
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. 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. So you might want to see this free collection of companies offering a high return on equity, or this list of stocks that insiders buy.
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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.