Even though Gulf Keystone Petroleum Limited’s (LON:GKP) recent earnings release was robust, the market didn’t seem to notice. We think that investors have missed some encouraging factors underlying the profit figures.
LSE:GKP Earnings and Revenue History March 27th 2025
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. This ratio tells us how much of a company’s profit is not backed by free cashflow.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
Gulf Keystone Petroleum has an accrual ratio of -0.13 for the year to December 2024. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. In fact, it had free cash flow of US$66m in the last year, which was a lot more than its statutory profit of US$7.16m. Notably, Gulf Keystone Petroleum had negative free cash flow last year, so the US$66m it produced this year was a welcome improvement.
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.
Gulf Keystone Petroleum’s accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Gulf Keystone Petroleum’s earnings potential is at least as good as it seems, and maybe even better! And it’s also positive that the company showed enough improvement to book a profit this year, after losing money last year. Of course, we’ve only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you’d like to know more about Gulf Keystone Petroleum as a business, it’s important to be aware of any risks it’s facing. You’d be interested to know, that we found 1 warning sign for Gulf Keystone Petroleum and you’ll want to know about this.
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