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The market for Helport AI Limited's (NASDAQ:HPAI) stock was strong after it released a healthy earnings report last week. However, we think that shareholders should be cautious as we found some worrying factors underlying the profit.
See our latest analysis for Helport AI
Zooming In On Helport AI's 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. The ratio shows us how much a company's profit exceeds its FCF.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
Over the twelve months to June 2024, Helport AI recorded an accrual ratio of 0.93. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of US$7.37m, a look at free cash flow indicates it actually burnt through US$2.4m in the last year. We also note that Helport AI's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of US$2.4m.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Helport AI.
Our Take On Helport AI's Profit Performance
As we have made quite clear, we're a bit worried that Helport AI didn't back up the last year's profit with free cashflow. For this reason, we think that Helport AI's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. To that end, you should learn about the 3 warning signs we've spotted with Helport AI (including 2 which can't be ignored).