Grown Rogue International's (CSE:GRIN) Earnings Offer More Than Meets The Eye

Despite posting healthy earnings, Grown Rogue International Inc.'s (CSE:GRIN ) stock has been quite weak. Along with the solid headline numbers, we think that investors have some reasons for optimism.

View our latest analysis for Grown Rogue International

Examining Cashflow Against Grown Rogue International'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. 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.

Over the twelve months to July 2023, Grown Rogue International recorded an accrual ratio of -0.26. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of US$3.3m during the period, dwarfing its reported profit of US$1.08m. Grown Rogue International shareholders are no doubt pleased that free cash flow improved over the last twelve months. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Grown Rogue International.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, Grown Rogue International issued 6.7% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. You can see a chart of Grown Rogue International's EPS by clicking here.

A Look At The Impact Of Grown Rogue International's Dilution On Its Earnings Per Share (EPS)

Three years ago, Grown Rogue International lost money. The good news is that profit was up 18% in the last twelve months. But EPS was less impressive, up only 15% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Grown Rogue International shareholders will want to see that EPS figure continue to increase. 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 Grown Rogue International's Profit Performance

At the end of the day, Grown Rogue International is diluting shareholders which will dampen earnings per share growth, but its accrual ratio showed it can back up its profits with free cash flow. Based on these factors, we think that Grown Rogue International's profits are a reasonably conservative guide to its underlying profitability. If you want to do dive deeper into Grown Rogue International, you'd also look into what risks it is currently facing. Case in point: We've spotted 2 warning signs for Grown Rogue International you should be aware of.

Our examination of Grown Rogue International has focussed on certain factors that can make its earnings look better than they are. 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.