APEX Investment Company P.S.C.'s (ADX:APEX) stock wasn't much affected by its recent lackluster earnings numbers. We did some analysis and found some concerning details beneath the statutory profit number.
A Closer Look At APEX Investment Company P.S.C'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. This ratio tells us how much of a company's profit is not backed by free cashflow.
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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
APEX Investment Company P.S.C has an accrual ratio of 0.36 for the year to March 2022. 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. Over the last year it actually had negative free cash flow of د.إ310m, in contrast to the aforementioned profit of د.إ18.1m. We saw that FCF was د.إ240m a year ago though, so APEX Investment Company P.S.C has at least been able to generate positive FCF in the past. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings. The good news for shareholders is that APEX Investment Company P.S.C's 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. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of APEX Investment Company P.S.C.
To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. APEX Investment Company P.S.C expanded the number of shares on issue by 606% over the last year. Therefore, each share now receives a smaller portion of profit. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of APEX Investment Company P.S.C's EPS by clicking here.
A Look At The Impact Of APEX Investment Company P.S.C's Dilution on Its Earnings Per Share (EPS).
We don't have any data on the company's profits from three years ago. Even looking at the last year, profit was still down 81%. Sadly, earnings per share fell further, down a full 66% in that time. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.
In the long term, if APEX Investment Company P.S.C's earnings per share can increase, then the share price should too. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.
Our Take On APEX Investment Company P.S.C's Profit Performance
As it turns out, APEX Investment Company P.S.C couldn't match its profit with cashflow and its dilution means that shareholders own less of the company than the did before (unless they bought more shares). For the reasons mentioned above, we think that a perfunctory glance at APEX Investment Company P.S.C'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 APEX Investment Company P.S.C at this point in time. When we did our research, we found 3 warning signs for APEX Investment Company P.S.C (2 are a bit unpleasant!) that we believe deserve your full attention.
In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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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.