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We Believe Imperial Petroleum’s (NASDAQ:IMPP) Earnings Are A Poor Guide For Its

Even though Imperial Petroleum Inc. (NASDAQ:IMPP) posted strong earnings recently, the stock hasn’t reacted in a large way. We think that investors might be worried about the foundations the earnings are built on.

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NasdaqCM:IMPP Earnings and Revenue History December 9th 2022

Zooming In On Imperial Petroleum’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. 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. 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 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”.

Over the twelve months to September 2022, Imperial Petroleum recorded an accrual ratio of 0.52. Statistically speaking, that’s a real negative for future earnings. And indeed, during the period the company didn’t produce any free cash flow whatsoever. In the last twelve months it actually had negative free cash flow, with an outflow of US$76m despite its profit of US$12.8m, mentioned above. We saw that FCF was US$5.1m a year ago though, so Imperial Petroleum has at least been able to generate positive FCF in the past. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings. The good news for shareholders is that Imperial Petroleum’s accrual ratio was much better last year, so this year’s poor reading might simply be a case of a short term mismatch between profit and FCF. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Imperial Petroleum.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Imperial Petroleum increased the number of shares on issue by 38,622,135% over the last twelve months by issuing new shares. As a result, its net income is now split between a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out Imperial Petroleum’s historical EPS growth by clicking on this link.

How Is Dilution…

Read More: We Believe Imperial Petroleum’s (NASDAQ:IMPP) Earnings Are A Poor Guide For Its

2022-12-09 04:41:12

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