Here's Why Academies Australasia Group's (ASX:AKG) Statutory Earnings Are Arguably Too Conservative

As a general rule, we think profitable companies are less risky than companies that lose money. 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 Academies Australasia Group (ASX:AKG).

We like the fact that Academies Australasia Group made a profit of AU$5.13m on its revenue of AU$65.9m, in the last year. The good news is that the company managed to grow its revenue over the last three years, and also move from loss-making to profitable.

See our latest analysis for Academies Australasia Group

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. As a result, we think it's well worth considering what Academies Australasia Group'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 Academies Australasia Group.

Examining Cashflow Against Academies Australasia Group's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. 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. 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. 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 December 2019, Academies Australasia Group recorded an accrual ratio of -0.34. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of AU$9.6m in the last year, which was a lot more than its statutory profit of AU$5.13m. Academies Australasia Group's free cash flow improved over the last year, which is generally good to see.

Our Take On Academies Australasia Group's Profit Performance

As we discussed above, Academies Australasia Group's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Academies Australasia Group's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share increased by 36% in 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. If you want to do dive deeper into Academies Australasia Group, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 3 warning signs for Academies Australasia Group you should know about.

This note has only looked at a single factor that sheds light on the nature of Academies Australasia Group'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. 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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