Investors signalled that they were pleased with Golden Matrix Group, Inc.'s (NASDAQ:GMGI) most recent earnings report, with a strong stock price reaction. This reaction by the market reaction is understandable when looking at headline profits and we have found some further encouraging factors.
Examining Cashflow Against Golden Matrix 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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.
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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
For the year to January 2022, Golden Matrix Group had an accrual ratio of -0.30. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of US$3.2m in the last year, which was a lot more than its statutory profit of US$1.16m. Golden Matrix Group shareholders are no doubt pleased that free cash flow improved over the last twelve months. 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 Golden Matrix Group.
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Golden Matrix Group issued 24% more new shares over the last year. That means its earnings are split among 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. Check out Golden Matrix Group's historical EPS growth by clicking on this link.
A Look At The Impact Of Golden Matrix Group's Dilution on Its Earnings Per Share (EPS).
Three years ago, Golden Matrix Group lost money. On the bright side, in the last twelve months it grew profit by 192%. On the other hand, earnings per share are only up 129% over the same period. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.
Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Golden Matrix Group shareholders will want to see that EPS figure continue to increase. 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.
Our Take On Golden Matrix Group's Profit Performance
In conclusion, Golden Matrix Group has strong cashflow relative to earnings, which indicates good quality earnings, but the dilution means its earnings per share growth is weaker than its profit growth. Based on these factors, we think that Golden Matrix Group's profits are a reasonably conservative guide to its underlying profitability. If you'd like to know more about Golden Matrix Group as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 2 warning signs for Golden Matrix Group you should know about.
In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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.
What are the risks and opportunities for Golden Matrix Group?
Earnings have declined by 26.6% per year over past 5 years
Does not have a meaningful market cap ($83M)
Shareholders have been diluted in the past year
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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.