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Last week's profit announcement from Powell Industries, Inc. (NASDAQ:POWL) was underwhelming for investors, despite headline numbers being robust. We did some digging and found some worrying underlying problems.
We've discovered 1 warning sign about Powell Industries. View them for free.
Examining Cashflow Against Powell Industries' Earnings
One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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 March 2025, Powell Industries had an accrual ratio of 1.35. Ergo, its free cash flow is significantly weaker than its profit. Statistically speaking, that's a real negative for future earnings. To wit, it produced free cash flow of US$51m during the period, falling well short of its reported profit of US$173.4m. Powell Industries' free cash flow actually declined over the last year, but it may bounce back next year, since free cash flow is often more volatile than accounting profits. One positive for Powell Industries shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.
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.
Our Take On Powell Industries' Profit Performance
As we discussed above, we think Powell Industries' earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Powell Industries' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But at least holders can take some solace from the 68% EPS growth in 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'd like to know more about Powell Industries as a business, it's important to be aware of any risks it's facing. At Simply Wall St, we found 1 warning sign for Powell Industries and we think they deserve your attention.