In This Article:
Even though Catalyst Pharmaceuticals, Inc.'s (NASDAQ:CPRX) recent earnings release was robust, the market didn't seem to notice. We think that investors have missed some encouraging factors underlying the profit figures.
A Closer Look At Catalyst Pharmaceuticals' Earnings
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. 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'.
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 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".
Catalyst Pharmaceuticals has an accrual ratio of -0.30 for the year to March 2025. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of US$268m in the last year, which was a lot more than its statutory profit of US$197.4m. Catalyst Pharmaceuticals' free cash flow improved over the last year, which is generally good to see.
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 Catalyst Pharmaceuticals' Profit Performance
As we discussed above, Catalyst Pharmaceuticals' accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Catalyst Pharmaceuticals' underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share have grown at an extremely impressive rate over the last three years. 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 want to do dive deeper into Catalyst Pharmaceuticals, you'd also look into what risks it is currently facing. For example - Catalyst Pharmaceuticals has 1 warning sign we think you should be aware of.