The Gaming Innovation Group’s (OB:GIG) performance is even better than its earnings suggest

Gaming Innovation Group Inc. (OB:GIG) Earnings announcement last week was disappointing for investors, despite decent earnings numbers. Our analysis indicates that investors should be optimistic, as strong earnings are based on strong fundamentals.

Check out our latest analysis for Gaming Innovation Group

OB: GIG Earnings and Earnings History August 23, 2022

Gaming Innovation Group Cash Flow vs Earnings Review

As finance nerds already know, the cash flow equalization ratio is a key metric for assessing how well a company’s free cash flow (FCF) matches its earnings. Put simply, this ratio subtracts FCF from net income and divides that number by the company’s average operating assets over that period. This ratio tells us how much of a company’s profit is not backed by free cash flow.

Therefore, it is 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 fine to have a positive accrual ratio, indicating some level of non-monetary benefits, a high accrual ratio is arguably a bad thing, as it indicates that the earnings on paper do not match the cash flow. Indeed, some academic studies have suggested that high accrual ratios tend to lead to lower earnings or less earnings growth.

Over the twelve months to June 2022, Gaming Innovation Group recorded a accrual ratio of -0.13. This indicates that his free cash flow was a bit higher than his statutory profit. In fact, he had a free cash flow of €11m last year, which was way above his statutory profit of €1.50m. Notably, Gaming Innovation Group had negative free cash flow last year, so the €11 million it produced this year was a welcome improvement. That said, there is more to consider. We also need to consider the impact of unusual items on statutory profit (and therefore the accrual rate), as well as note the ramifications of the company issuing new shares.

This might make you wonder what analysts predict in terms of future profitability. Luckily, you can click here to see an interactive chart outlining future profitability, based on their estimates.

To understand the value of a company’s earnings growth, it is imperative to consider any dilution of shareholder interests. Gaming Innovation Group has increased the number of shares issued by 27% over the past year. Therefore, each stock now receives a smaller portion of the profits. Talking about net profit, without noticing earnings per share, is being distracted by the big numbers while ignoring the small numbers that speak to per share assess. You can see a graphic of Gaming Innovation Group’s EPS by clicking here.

A look at the impact of the Gaming Innovation Group’s dilution on its earnings per share (EPS)

Gaming Innovation Group was losing money three years ago. Zooming in on last year, we still can’t talk about growth rate consistently because it made a loss last year. But math aside, it’s always good to see when a once unprofitable business turns good (although we accept that the profit would have been higher had the dilution not been necessary). And so, we can quite clearly see that dilution has a fairly significant impact on shareholders.

In the long term, if the results of Gaming Innovation Group per share may rise, the stock price should also rise. But on the other hand, we would be much less excited to hear that earnings (but not EPS) are improving. For the ordinary retail shareholder, EPS is an excellent metric to verify your hypothetical “share” of company earnings.

How do unusual items affect earnings?

Gaming Innovation Group’s profit was reduced by unusual items worth €1.7 million over the last twelve months, which helped it produce high cash conversion, as evidenced by its unusual items. This is what you would expect to see when a company has a non-monetary charge reducing paper profits. It’s never good to see unusual items cost the company profit, but on the bright side, things might improve sooner rather than later. We have reviewed thousands of listed companies and found that unusual items are very often unique in nature. And, after all, that’s exactly what accounting terminology implies. If Gaming Innovation Group does not see this unusual expense repeat itself, all else being equal, we expect its earnings to increase in the coming year.

The earnings performance of our gaming innovation group

In summary, Gaming Innovation Group’s accrual rate and unusual items suggest that its statutory earnings have been temporarily depressed (and may rebound), while dilution is negative for shareholders. Based on these factors, we believe Gaming Innovation Group’s earning potential is at least as good as it looks, and maybe even better! With this in mind, we would not consider investing in a stock unless we have a thorough understanding of the risks. To do this, you need to find out about the 3 warning signs we spotted with Gaming Innovation Group (including 1 that should not be overlooked).

Our Gaming Innovation Group review has focused on some factors that can make its earnings look better than they are. And it went brilliantly. But there’s always more to discover if you’re able to focus on the details. Some people consider a high return on equity to be a good sign of a quality company. So you might want to see this free collection of companies offering a high return on equity, or this list of stocks that insiders buy.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

Calculation of discounted cash flows for each share

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