Propel Global Berhad's (KLSE:PGB) Shareholders Have More To Worry About Than Lackluster Earnings

Shareholders didn't appear too concerned by Propel Global Berhad's (KLSE:PGB) weak earnings. We did some digging, and we believe that investors are missing some worrying factors underlying the profit figures.

See our latest analysis for Propel Global Berhad

Examining Cashflow Against Propel Global Berhad'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. 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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Propel Global Berhad has an accrual ratio of 0.69 for the year to June 2023. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of RM7.72m, a look at free cash flow indicates it actually burnt through RM30m in the last year. We also note that Propel Global Berhad's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of RM30m. Notably, the company has issued new shares, thus diluting existing shareholders and reducing 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 Propel Global Berhad.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Propel Global Berhad expanded the number of shares on issue by 5.1% over the last year. Therefore, each share now receives a smaller portion of profit. 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 Propel Global Berhad's EPS by clicking here.

How Is Dilution Impacting Propel Global Berhad's Earnings Per Share (EPS)?

Propel Global Berhad was losing money three years ago. Even looking at the last year, profit was still down 88%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 65% in the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

If Propel Global Berhad's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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 Propel Global Berhad's Profit Performance

In conclusion, Propel Global Berhad has weak cashflow relative to earnings, which indicates lower quality earnings, and the dilution means that shareholders now own a smaller proportion of the company (assuming they maintained the same number of shares). Considering all this we'd argue Propel Global Berhad's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into Propel Global Berhad, you'd also look into what risks it is currently facing. For example, Propel Global Berhad has 5 warning signs (and 1 which shouldn't be ignored) we think you should know about.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.

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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.