Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. In this article, we’ll look at how useful this year’s statutory profit is, when analysing Manhattan Associates (NASDAQ:MANH).
We like the fact that Manhattan Associates made a profit of US$94.9m on its revenue of US$609.4m, in the last year. In the last few years its profit has fallen, although its revenue was steady, as you can see in the chart below.
View our latest analysis for Manhattan Associates
Not all profits are equal, and we can learn more about the nature of a company’s past profitability by diving deeper into the financial statements. Today, we’ll discuss Manhattan Associates’s free cashflow relative to its earnings, and consider what that tells us about the company. 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.
Examining Cashflow Against Manhattan Associates’s Earnings
Many investors haven’t heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company’s profit is backed up by free cash flow (FCF) during a given period. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company’s average operating assets over that period. You could think of the accrual ratio from cashflow as the ‘non-FCF profit ratio’.
Therefore, it’s 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 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. That’s because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
Manhattan Associates has an accrual ratio of -0.91 for the year to September 2019. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of US$133m in the last year, which was a lot more than its statutory profit of US$94.9m. Manhattan Associates’s free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.
Our Take On Manhattan Associates’s Profit Performance
Happily for shareholders, Manhattan Associates produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Manhattan Associates’s statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company’s potential, but there is plenty more to consider. Ultimately, this article has formed an opinion based on historical data. However, it can also be great to think about what analysts are forecasting for the future. At Simply Wall St, we have analyst estimates which you can view by clicking here.
This note has only looked at a single factor that sheds light on the nature of Manhattan Associates’s profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
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December 24, 2019 at 12:20AM
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We Think Manhattan Associates’s (NASDAQ:MANH) Statutory Profit Might Understate Its Earnings Potential - Simply Wall St
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