CyberArk Software Ltd. (NASDAQ:CYBR) just reported healthy earnings, but the stock price didn’t move much. Investors are likely missing some underlying factors that are encouraging for the company’s future.
Check out our latest analysis for CyberArk Software
As financial nerds already know, the accrual ratio from cash flow is an important measure for assessing how well a company’s free cash flow (FCF) matches its profits. To get the accrual ratio, we first subtract free cash flow from earnings for a period, and then divide that number by average operating assets for the period. The ratio shows us how much a company’s profit exceeds its free cash flow.
Therefore, it is actually considered a good thing if a company has a negative accrual ratio, but a bad thing if the accrual ratio is positive. While it’s not a problem to have a positive accrual ratio, which indicates a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates that paper profits are not accompanied by cash flow. To quote a 2014 paper by Lewellen and Resutek, “companies with higher accruals tend to be less profitable in the future.”
Over the twelve months to September 2024, CyberArk Software recorded an accrual ratio of -0.57. This indicates that the free cash flow largely exceeded the statutory profit. In fact, the company produced free cash flow of $206 million during the period, dwarfing its reported profit of $12.6 million. CyberArk Software shareholders are no doubt pleased that free cash flow has improved over the past twelve months. Unfortunately for shareholders, the company has also issued new shares, diluting their share of future profits.
You may be wondering what analysts are predicting in terms of future profitability. Fortunately, you can click here to see an interactive graph showing future profitability, based on their estimates.
To understand the potential for return per share, it’s essential to think about the extent to which a company is diluting its shareholders. CyberArk Software has even increased the number of shares outstanding by 5.4% over the past twelve months by issuing new shares. This means that the profit is divided over a larger number of shares. Talking about net income without noticing earnings per share means getting distracted by the big numbers while ignoring the smaller numbers that speak to earnings per share. per share value. You can see a graph of CyberArk Software’s EPS by clicking here.
Three years ago, CyberArk Software lost money. If we zoom in on the past year, we still can’t talk about the growth figures in a coherent way, as losses were incurred last year. But math aside, it’s always good to see when a previously unprofitable company is heading in the right direction (although we assume profits would have been higher if no dilution had been necessary). So you can see that the dilution has had some impact on shareholders.
