As a general rule, we think profitable companies are less risky than companies that lose money. 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. Today we’ll focus on whether this year’s statutory profits are a good guide to understanding BASSAC Société anonyme (EPA:BASS).
It’s good to see that over the last twelve months BASSAC Société anonyme made a profit of €97.2m on revenue of €975.6m. Happily, it has grown both its profit and revenue over the last three years, as you can see in the chart below.
Importantly, statutory profits are not always the best tool for understanding a company’s true earnings power, so it’s well worth examining profits in a little more detail. So today we’ll look at what BASSAC Société anonyme’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.
Zooming In On BASSAC Société anonyme’s Earnings
In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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.
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. That’s because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
BASSAC Société anonyme has an accrual ratio of -0.14 for the year to December 2019. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of €187m during the period, dwarfing its reported profit of €97.2m. BASSAC Société anonyme shareholders are no doubt pleased that free cash flow improved over the last twelve months.
Our Take On BASSAC Société anonyme’s Profit Performance
BASSAC Société anonyme’s accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that BASSAC Société anonyme’s statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at an extremely impressive rate over the last three years. 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. 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 found that BASSAC Société anonyme has 2 warning signs (1 is a bit concerning!) that deserve your attention before going any further with your analysis.
This note has only looked at a single factor that sheds light on the nature of BASSAC Société anonyme’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.
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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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