Broadly speaking, profitable businesses are less risky than unprofitable ones. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it’s not always clear whether statutory profits are a good guide, going forward. This article will consider whether StrongPoint‘s (OB:STRONG) statutory profits are a good guide to its underlying earnings.
While StrongPoint was able to generate revenue of kr1.12b in the last twelve months, we think its profit result of kr21.0m was more important. In the last few years its profit has fallen, although its revenue was steady, as you can see in the chart below.
See our latest analysis for StrongPoint
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 StrongPoint’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.
Zooming In On StrongPoint’s Earnings
As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company’s free cash flow (FCF) matches its profit. 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. The ratio shows us how much a company’s profit exceeds its FCF.
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 having an accrual ratio above zero is of little concern, we do think it’s worth noting when a company has a relatively high accrual ratio. That’s because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
Over the twelve months to September 2019, StrongPoint recorded an accrual ratio of -0.13. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of kr61m in the last year, which was a lot more than its statutory profit of kr21.0m. StrongPoint’s free cash flow improved over the last year, which is generally good to see.
Our Take On StrongPoint’s Profit Performance
As we discussed above, StrongPoint has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that StrongPoint’s statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. 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. Obviously, we love to consider the historical data to inform our opinion of a company. But it can be really valuable to consider what other analysts are forecasting. So feel free to check out our free graph representing analyst forecasts.
This note has only looked at a single factor that sheds light on the nature of StrongPoint’s profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.
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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January 17, 2020 at 07:30PM
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Does StrongPoint’s (OB:STRONG) Statutory Profit Adequately Reflect Its Underlying Profit? - Simply Wall St
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