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The market rallied behind BTCS Inc.'s (NASDAQ:BTCS) stock, leading do a rise in the share price after its recent weak earnings report. While shareholders may be willing to overlook soft profit numbers, we believe that they should also be taking into account some other factors which may be cause for concern.
Check out our latest analysis for BTCS
Examining Cashflow Against BTCS' Earnings
Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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.
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 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 September 2024, BTCS had an accrual ratio of 0.27. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Over the last year it actually had negative free cash flow of US$3.3m, in contrast to the aforementioned profit of US$1.16m. We also note that BTCS' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of US$3.3m. Notably, the company has issued new shares, thus diluting existing shareholders and reducing 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.
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. BTCS expanded the number of shares on issue by 21% over the last year. Therefore, each share now receives a smaller portion of profit. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. You can see a chart of BTCS' EPS by clicking here.
A Look At The Impact Of BTCS' Dilution On Its Earnings Per Share (EPS)
Three years ago, BTCS lost money. And even focusing only on the last twelve months, we see profit is down 34%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 41% in the same period. So you can see that the dilution has had a bit of an impact on shareholders.