It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. 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. This article will consider whether GlobalSCAPE‘s (NYSEMKT:GSB) statutory profits are a good guide to its underlying earnings.
While GlobalSCAPE was able to generate revenue of US$39.1m in the last twelve months, we think its profit result of US$12.6m was more important. In the chart below, you can see that its profit and revenue have both grown over the last three years.
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. As a result, we think it’s well worth considering what GlobalSCAPE’s cashflow (when compared to its earnings) can tell us about the nature of its statutory profit. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of GlobalSCAPE.
A Closer Look At GlobalSCAPE’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. 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’.
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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
GlobalSCAPE has an accrual ratio of -0.54 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$16m in the last year, which was a lot more than its statutory profit of US$12.6m. GlobalSCAPE’s free cash flow improved over the last year, which is generally good to see.
Our Take On GlobalSCAPE’s Profit Performance
As we discussed above, GlobalSCAPE’s accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think GlobalSCAPE’s underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Better yet, its EPS are growing strongly, which is nice to see. 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. While it’s very important to consider the profit and loss statement, you can also learn a lot about a company by looking at its balance sheet. You can seeour latest analysis on GlobalSCAPE’s balance sheet health here.
This note has only looked at a single factor that sheds light on the nature of GlobalSCAPE’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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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