Are Apple’s (NASDAQ:AAPL) Statutory Earnings A Good Reflection Of Its Earnings Potential?

Statistically speaking, it is less risky to invest in profitable companies than in 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. In this article, we’ll look at how useful this year’s statutory profit is, when analysing Apple (NASDAQ:AAPL).

We like the fact that Apple made a profit of US$58.4b on its revenue of US$273.9b, in the last year. In the chart below, you can see that its profit and revenue have both grown over the last three years.

Check out our latest analysis for Apple

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NasdaqGS:AAPL Earnings and Revenue History August 21st 2020

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. So today we’ll look at what Apple’s cashflow tells us about the quality of its earnings. 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 Apple’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. 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.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. That is not intended to imply we should worry about a positive accrual ratio, but it’s worth noting where the accrual ratio is rather high. To quote a 2014 paper by Lewellen and Resutek, “firms with higher accruals tend to be less profitable in the future”.

Over the twelve months to June 2020, Apple recorded an accrual ratio of -0.13. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of US$72b in the last year, which was a lot more than its statutory profit of US$58.4b. Apple’s free cash flow improved over the last year, which is generally good to see.

Our Take On Apple’s Profit Performance

As we discussed above, Apple has perfectly satisfactory free cash flow relative to profit. Because of this, we think Apple’s earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 50% annually, over the last three years. At the end of the day, it’s essential to consider more than just the factors above, if you want to understand the company properly. In light of this, if you’d like to do more analysis on the company, it’s vital to be informed of the risks involved. For example, we’ve discovered 2 warning signs that you should run your eye over to get a better picture of Apple.

Today we’ve zoomed in on a single data point to better understand the nature of Apple’s profit. But there are plenty of other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to ‘follow the money’ and search out stocks that insiders are buying. 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.

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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