Despite announcing strong earnings, Bridger Aerospace Group Holdings, Inc.'s (NASDAQ:BAER) stock was sluggish. Our analysis uncovered some concerning factors that we believe the market might be paying attention to.
See our latest analysis for Bridger Aerospace Group Holdings
Zooming In On Bridger Aerospace Group Holdings' 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 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".
Bridger Aerospace Group Holdings has an accrual ratio of 0.40 for the year to September 2023. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. In the last twelve months it actually had negative free cash flow, with an outflow of US$65m despite its profit of US$22.9m, mentioned above. We also note that Bridger Aerospace Group Holdings' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of US$65m. The good news for shareholders is that Bridger Aerospace Group Holdings' accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. As a result, some shareholders may be looking for stronger cash conversion in the current year.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Bridger Aerospace Group Holdings.
Our Take On Bridger Aerospace Group Holdings' Profit Performance
As we have made quite clear, we're a bit worried that Bridger Aerospace Group Holdings didn't back up the last year's profit with free cashflow. For this reason, we think that Bridger Aerospace Group Holdings' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The good news is that it earned a profit in the last twelve months, despite its previous loss. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. You'd be interested to know, that we found 3 warning signs for Bridger Aerospace Group Holdings and you'll want to know about these bad boys.
This note has only looked at a single factor that sheds light on the nature of Bridger Aerospace Group Holdings' profit. 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. 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 that insiders are buying 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.