We Think That There Are Issues Underlying G.P. Global Power's (TLV:GPGB-M) Earnings

Last week's profit announcement from G.P. Global Power Ltd (TLV:GPGB-M) was underwhelming for investors, despite headline numbers being robust. We did some digging and found some worrying underlying problems.

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Zooming In On G.P. Global Power's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. 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.

G.P. Global Power has an accrual ratio of 0.24 for the year to June 2025. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Even though it reported a profit of ₪32.2m, a look at free cash flow indicates it actually burnt through ₪3.0m in the last year. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of ₪3.0m, this year, indicates high risk. One positive for G.P. Global Power shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. 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 G.P. Global Power.

Our Take On G.P. Global Power's Profit Performance

G.P. Global Power didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that G.P. Global Power's true underlying earnings power is actually less than its statutory profit. On the bright side, the company showed enough improvement to book a profit this year, after losing money last year. 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 G.P. Global Power as a business, it's important to be aware of any risks it's facing. For instance, we've identified 4 warning signs for G.P. Global Power (3 are potentially serious) you should be familiar with.

Today we've zoomed in on a single data point to better understand the nature of G.P. Global Power's profit. 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 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.