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When companies post strong earnings, the stock generally performs well, just like Catalyst Pharmaceuticals, Inc.'s (NASDAQ:CPRX) stock has recently. We have done some analysis, and we found several positive factors beyond the profit numbers.
View our latest analysis for Catalyst Pharmaceuticals
Examining Cashflow Against Catalyst 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. 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 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.
Over the twelve months to September 2024, Catalyst Pharmaceuticals recorded an accrual ratio of -0.19. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of US$186m during the period, dwarfing its reported profit of US$142.8m. Notably, Catalyst Pharmaceuticals had negative free cash flow last year, so the US$186m 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.
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.
To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Catalyst Pharmaceuticals issued 12% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. You can see a chart of Catalyst Pharmaceuticals' EPS by clicking here.
A Look At The Impact Of Catalyst Pharmaceuticals' Dilution On Its Earnings Per Share (EPS)
Catalyst Pharmaceuticals has improved its profit over the last three years, with an annualized gain of 243% in that time. In comparison, earnings per share only gained 209% over the same period. And the 130% profit boost in the last year certainly seems impressive at first glance. But in comparison, EPS only increased by 111% over the same period. So you can see that the dilution has had a bit of an impact on shareholders.