MLGO

Investors appear disappointed with MicroAlgo Inc.'s (NASDAQ:MLGO) recent earnings, despite the decent statutory profit number. We did some digging and found some worrying factors that they might be paying attention to. Our free stock report includes 4 warning signs investors should be aware of before investing in MicroAlgo. Read for free now. 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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'. Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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". For the year to December 2024, MicroAlgo had an accrual ratio of 0.45. That means it didn't generate anywhere near enough free cash flow to match its profit. Statistically speaking, that's a real negative for future earnings. In fact, it had free cash flow of CN¥29m in the last year, which was a lot less than its statutory profit of CN¥38.6m. Notably, MicroAlgo had negative free cash flow last year, so the CN¥29m it produced this year was a welcome improvement. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings. The good news for shareholders is that MicroAlgo'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. As a result, some shareholders may be looking for stronger cash conversion in the current year. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of MicroAlgo. To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. MicroAlgo expanded the number of shares on issue by 5,9...

Revenue: CN¥541.5m (down 6.6% from FY 2023). Net income: CN¥38.6m (up from CN¥268.2m loss in FY 2023). Profit margin: 7.1% (up from net loss in FY 2023). The move to profitability was driven by lower expenses. EPS: CN¥10.52 (up from CN¥1,176 loss in FY 2023). Our free stock report includes 4 warning signs investors should be aware of before investing in MicroAlgo. Read for free now. All figures shown in the chart above are for the trailing 12 month (TTM) period MicroAlgo shares are down 38% from a week ago. We don't want to rain on the parade too much, but we did also find 4 warning signs for MicroAlgo (3 shouldn't be ignored!) that you need to be mindful of. Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.