There May Be Reason For Hope In Medexus Pharmaceuticals' (TSE:MDP) Disappointing Earnings

Medexus Pharmaceuticals Inc.'s (TSE:MDP) stock was strong despite it releasing a soft earnings report last week. We think that investors might be looking at some positive factors beyond the earnings numbers.

Check out our latest analysis for Medexus Pharmaceuticals

Zooming In On Medexus Pharmaceuticals' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Medexus Pharmaceuticals has an accrual ratio of -0.28 for the year to June 2024. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of US$22m, well over the US$1.09m it reported in profit. Medexus Pharmaceuticals shareholders are no doubt pleased that free cash flow improved over the last twelve months. Having said that, there is more to consider. We can look at how unusual items in the profit and loss statement impacted its accrual ratio, as well as explore how dilution is impacting shareholders negatively.

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.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Medexus Pharmaceuticals expanded the number of shares on issue by 20% over the last year. That means its earnings are split among a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. You can see a chart of Medexus Pharmaceuticals' EPS by clicking here.

A Look At The Impact Of Medexus Pharmaceuticals' Dilution On Its Earnings Per Share (EPS)

Medexus Pharmaceuticals was losing money three years ago. Even looking at the last year, profit was still down 67%. Sadly, earnings per share fell further, down a full 71% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.

If Medexus Pharmaceuticals' EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. 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.

The Impact Of Unusual Items On Profit

Medexus Pharmaceuticals' profit was reduced by unusual items worth US$2.3m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. This is what you'd expect to see where a company has a non-cash charge reducing paper profits. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Medexus Pharmaceuticals to produce a higher profit next year, all else being equal.

Our Take On Medexus Pharmaceuticals' Profit Performance

Summing up, Medexus Pharmaceuticals' accrual ratio and its unusual items suggest that its statutory earnings were temporarily depressed (and could bounce back), while the dilution is a negative for shareholders. Looking at all these factors, we'd say that Medexus Pharmaceuticals' underlying earnings power is at least as good as the statutory numbers would make it seem. If you want to do dive deeper into Medexus Pharmaceuticals, you'd also look into what risks it is currently facing. Be aware that Medexus Pharmaceuticals is showing 5 warning signs in our investment analysis and 1 of those is potentially serious...

After our examination into the nature of Medexus Pharmaceuticals' profit, we've come away optimistic for the company. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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.