The quality of Glu Mobile’s earnings may look good, but the company’s valuation is very unattractive to analysts at Jefferson Research. They downgraded the game developer from Hold to Sell in their report dated Dec. 26, 2014. The firm cited declines in Glu’s valuation and balance sheet ratings.

Glu’s earnings quality, cash flow quality unchanged

In their report, Jefferson analysts said they continue to rate Glu Mobile’s earnings quality as Strongest. The company’s reported net income was $10 million and the same number as the adjusted net income. As a result, they call Glu’s net income earnings quality “extremely high.”

They did note a decline in operating cash flow during the third quarter, however, which fell from $5 million to $2 million. Jefferson continues to rate Glu Mobile’s cash flow quality at Weakest, although the firm reported an improvement in the quality of the company’s cash flow, as the reported number was a loss of $9 million and the adjusted number was 166.7% of the reported number. The analysts said this improvement wasn’t enough to move the needle on Glu Mobile’s cash flow quality.

Glu Mobile

Glu Mobile receives downgrades in three areas

The Jefferson analysts downgraded the game maker’s operating efficiency from Strong to Weak. They cited deterioration in the company’s return on incremental investment capital, equity turnover, gross margins and asset turnover for that downgrade. They report that the lower equity turnover suggests Glu Mobile’s revenues per dollar of equity have declined.

The analysts downgraded Glu’s balance sheet quality from Strong to Weakest due to deterioration in AR DSOs, quick ratio, current ratio and cash position. They said accounts receivable DSOs rose from 40 to 67 days, indicating that it’s taking longer for Glu’s customers to pay up. The result is decreased liquidity. They also said Glu’s quick ratio fell from 2.4 times to 1.3 times, which indicates that the company decreased its liquid assets compared to its current liabilities.

The Jefferson team also downgraded Glu Mobile’s valuation, moving it from Least Risk to Medium Risk based on price to earnings, growth in price to earnings and price to cash flow.

Shares of Glu Mobile edged downward more than 2% during regular trading hours today.