The market was pleased with the recent earnings report from Genie Energy Ltd. (NYSE:GNE), despite the profit numbers being soft. We think that investors might be looking at some positive factors beyond the earnings numbers.
See our latest analysis for Genie Energy
As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company’s free cash flow (FCF) matches its profit. 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. 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. 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 June 2024, Genie Energy had an accrual ratio of -0.74. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of US$64m, well over the US$7.92m it reported in profit. Genie Energy did see its free cash flow drop year on year, which is less than ideal, like a Simpson’s episode without Groundskeeper Willie.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Genie Energy.
Happily for shareholders, Genie Energy produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Genie Energy’s statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the 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 want to do dive deeper into Genie Energy, you’d also look into what risks it is currently facing. While conducting our analysis, we found that Genie Energy has 2 warning signs and it would be unwise to ignore these.
This note has only looked at a single factor that sheds light on the nature of Genie Energy’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. 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 with significant insider holdings to be useful.