Maxim Power's (TSE:MXG) Problems Go Beyond Weak Profit

The latest earnings report from Maxim Power Corp. (TSE:MXG ) disappointed investors. We did some digging and think there are some comforting factors lying beneath the statutory profit numbers.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

Examining Cashflow Against Maxim Power'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. The ratio shows us how much a company's profit exceeds its FCF.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to December 2024, Maxim Power had an accrual ratio of -0.17. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of CA$77m in the last year, which was a lot more than its statutory profit of CA$21.9m. Notably, Maxim Power had negative free cash flow last year, so the CA$77m it produced this year was a welcome improvement. Having said that, there is more to consider. We must also consider the impact of unusual items on statutory profit (and thus the accrual ratio), as well as note the ramifications of the company issuing new shares.

See our latest analysis for Maxim Power

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Maxim Power.

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, Maxim Power issued 26% more new shares over the last year. As a result, its net income is now split between a greater number of shares. 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 Maxim Power's EPS by clicking here.

How Is Dilution Impacting Maxim Power's Earnings Per Share (EPS)?

Maxim Power's net profit dropped by 72% per year over the last three years. And even focusing only on the last twelve months, we see profit is down 22%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 26% in the same period. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

If Maxim Power's 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

While the accrual ratio might bode well, we also note that Maxim Power's profit was boosted by unusual items worth CA$8.3m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that Maxim Power's positive unusual items were quite significant relative to its profit in the year to December 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Maxim Power's Profit Performance

In conclusion, Maxim Power's accrual ratio suggests its earnings are well backed by cash but its boost from unusual items is probably not going to be repeated consistently. Meanwhile, the dilution was a negative for shareholders. Based on these factors, we think that Maxim Power's statutory profits probably make it seem better than it is on an underlying level. If you'd like to know more about Maxim Power as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 3 warning signs for Maxim Power you should be aware of.

Our examination of Maxim Power has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. But there are plenty of other ways to inform your opinion of a company. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.