Investors Shouldn't Be Too Comfortable With Pop Culture Group's (NASDAQ:CPOP) Robust Earnings

By
Simply Wall St
Published
November 16, 2021
NasdaqGM:CPOP
Source: Shutterstock

Pop Culture Group Co., Ltd's (NASDAQ:CPOP) robust earnings report didn't manage to move the market for its stock. Our analysis suggests that shareholders have noticed something concerning in the numbers.

Check out our latest analysis for Pop Culture Group

earnings-and-revenue-history
NasdaqGM:CPOP Earnings and Revenue History November 17th 2021

Zooming In On Pop Culture Group'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.

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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to June 2021, Pop Culture Group recorded an accrual ratio of 0.42. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. In the last twelve months it actually had negative free cash flow, with an outflow of US$4.0m despite its profit of US$4.27m, mentioned above. We also note that Pop Culture Group's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of US$4.0m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Pop Culture Group.

Our Take On Pop Culture Group's Profit Performance

As we have made quite clear, we're a bit worried that Pop Culture Group didn't back up the last year's profit with free cashflow. For this reason, we think that Pop Culture Group's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Our analysis shows 3 warning signs for Pop Culture Group (1 is significant!) and we strongly recommend you look at these before investing.

This note has only looked at a single factor that sheds light on the nature of Pop Culture Group's profit. 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 that insiders are buying.

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