Impressive Earnings May Not Tell The Whole Story For Presight AI Holding (ADX:PRESIGHT)

Despite posting some strong earnings, the market for Presight AI Holding PLC's (ADX:PRESIGHT) stock hasn't moved much. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

Check out our latest analysis for Presight AI Holding

A Closer Look At Presight AI Holding's 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. The ratio shows us how much a company's profit exceeds its FCF.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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.

For the year to March 2024, Presight AI Holding had an accrual ratio of 1.17. 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. In the last twelve months it actually had negative free cash flow, with an outflow of د.إ277m despite its profit of د.إ593.7m, mentioned above. We saw that FCF was د.إ1.3b a year ago though, so Presight AI Holding has at least been able to generate positive FCF in the past. The good news for shareholders is that Presight AI Holding'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. 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 Presight AI Holding.

Our Take On Presight AI Holding's Profit Performance

As we discussed above, we think Presight AI Holding's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Presight AI Holding's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. Sadly, its EPS was down over the last twelve months. 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 Presight AI Holding as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 2 warning signs we've spotted with Presight AI Holding (including 1 which is potentially serious).

This note has only looked at a single factor that sheds light on the nature of Presight AI Holding's 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.