The Platform Group AG (ETR:FSNT) announced strong profits, but the stock was stagnant. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.
View our latest analysis for Platform Group
In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. This ratio tells us how much of a company’s profit is not backed by free cashflow.
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. 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 2024, Platform Group recorded an accrual ratio of -0.50. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of €105m during the period, dwarfing its reported profit of €55.5m. Platform Group’s free cash flow improved over the last year, which is generally good to see. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings.
That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.
In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Platform Group increased the number of shares on issue by 223% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. You can see a chart of Platform Group’s EPS by clicking here.
Unfortunately, we don’t have any visibility into its profits three years back, because we lack the data. And even focusing only on the last twelve months, we see profit is down . Sadly, earnings per share fell further, down a full -378% in that time. So you can see that the dilution has had a fairly significant impact on shareholders.
In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Platform Group can grow EPS persistently. But on the other hand, we’d be far less excited to learn profit (but not EPS) was improving. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical “share” of the company’s profit.
In conclusion, Platform 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. Given the contrasting considerations, we don’t have a strong view as to whether Platform Group’s profits are an apt reflection of its underlying potential for profit. So if you’d like to dive deeper into this stock, it’s crucial to consider any risks it’s facing. Our analysis shows 3 warning signs for Platform Group (2 make us uncomfortable!) and we strongly recommend you look at them before investing.
Our examination of Platform Group has focussed on certain factors that can make its earnings look better than they are. But there are plenty of other ways to inform your opinion of a company. 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.