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Even though Rigel Pharmaceuticals, Inc. (NASDAQ:RIGL ) posted strong earnings, investors appeared to be underwhelmed. We did some digging and actually think they are being unnecessarily pessimistic.
View our latest analysis for Rigel Pharmaceuticals
Zooming In On Rigel Pharmaceuticals' Earnings
One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. This ratio tells us how much of a company's profit is not backed by free cashflow.
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. 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 December 2024, Rigel Pharmaceuticals had an accrual ratio of -0.63. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of US$31m in the last year, which was a lot more than its statutory profit of US$17.5m. Notably, Rigel Pharmaceuticals had negative free cash flow last year, so the US$31m it produced this year was a welcome improvement.
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 Rigel Pharmaceuticals' Profit Performance
Happily for shareholders, Rigel Pharmaceuticals produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Rigel Pharmaceuticals' statutory profit actually understates its earnings potential! And it's also positive that the company showed enough improvement to book a profit this year, after losing money last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you want to do dive deeper into Rigel Pharmaceuticals, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 2 warning signs for Rigel Pharmaceuticals you should know about.