Investors appear disappointed with MicroAlgo Inc.’s (NASDAQ:MLGO) recent earnings, despite the decent statutory profit number. We did some digging and found some worrying factors that they might be paying attention to.
Our free stock report includes 4 warning signs investors should be aware of before investing in MicroAlgo. Read for free now.
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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company’s average operating assets over that period. You could think of the accrual ratio from cashflow as the ‘non-FCF profit ratio’.
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 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”.
For the year to December 2024, MicroAlgo had an accrual ratio of 0.45. That means it didn’t generate anywhere near enough free cash flow to match its profit. Statistically speaking, that’s a real negative for future earnings. In fact, it had free cash flow of CN¥29m in the last year, which was a lot less than its statutory profit of CN¥38.6m. Notably, MicroAlgo had negative free cash flow last year, so the CN¥29m it produced this year was a welcome improvement. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings. The good news for shareholders is that MicroAlgo’s accrual ratio was much better last year, so this year’s poor reading might simply be a case of a short term mismatch between profit and FCF. As a result, some shareholders may be looking for stronger cash conversion in the current year.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of MicroAlgo.
To understand the value of a company’s earnings growth, it is imperative to consider any dilution of shareholders’ interests. MicroAlgo expanded the number of shares on issue by 5,977% over the last year. That means its earnings are split among a greater number of shares. 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 MicroAlgo’s EPS by clicking here.
Read More: We Don’t Think MicroAlgo’s (NASDAQ:MLGO) Earnings Should Make Shareholders
