Unsurprisingly, HighPeak Energy, Inc.’s (NASDAQ:HPK) stock price was strong on the back of its healthy earnings report. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.
Examining Cashflow Against HighPeak Energy’s Earnings
One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company’s average operating assets over that period. The ratio shows us how much a company’s profit exceeds its FCF.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. That is not intended to imply we should worry about a positive accrual ratio, but it’s worth noting where the accrual ratio is rather high. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
For the year to March 2021, HighPeak Energy had an accrual ratio of 0.40. As a general rule, that bodes poorly for future profitability. 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$107m despite its profit of US$69.1m, mentioned above. We also note that HighPeak Energy’s free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of US$107m.
Our Take On HighPeak Energy’s Profit Performance
As we have made quite clear, we’re a bit worried that HighPeak Energy didn’t back up the last year’s profit with free cashflow. As a result, we think it may well be the case that HighPeak Energy’s underlying earnings power is lower than its statutory profit. At the end of the day, it’s essential to consider more than just the factors above, if you want to understand the company properly. If you’d like to know more about HighPeak Energy as a business, it’s important to be aware of any risks it’s facing.