Despite posting some strong earnings, the market for Pioneer Power Solutions, Inc.'s (NASDAQ:PPSI) stock hasn't moved much. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.
See our latest analysis for Pioneer Power Solutions
Examining Cashflow Against Pioneer Power Solutions' 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). 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. 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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
For the year to September 2023, Pioneer Power Solutions had an accrual ratio of 0.75. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of US$1.78m, a look at free cash flow indicates it actually burnt through US$5.5m in the last year. We also note that Pioneer Power Solutions' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of US$5.5m.
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.
Our Take On Pioneer Power Solutions' Profit Performance
As we have made quite clear, we're a bit worried that Pioneer Power Solutions didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Pioneer Power Solutions' underlying earnings power is lower than its statutory profit. 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. If you'd like to know more about Pioneer Power Solutions as a business, it's important to be aware of any risks it's facing. To help with this, we've discovered 3 warning signs (1 shouldn't be ignored!) that you ought to be aware of before buying any shares in Pioneer Power Solutions.
This note has only looked at a single factor that sheds light on the nature of Pioneer Power Solutions' profit. 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 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.