Stock Analysis

Are Linamar's (TSE:LNR) Statutory Earnings A Good Reflection Of Its Earnings Potential?

  •  Updated
TSX:LNR
Source: Shutterstock

Broadly speaking, profitable businesses are less risky than unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. In this article, we'll look at how useful this year's statutory profit is, when analysing Linamar (TSE:LNR).

It's good to see that over the last twelve months Linamar made a profit of CA$215.8m on revenue of CA$5.73b. Below, you can see that both its revenue and its profit have fallen over the last three years.

Check out our latest analysis for Linamar

earnings-and-revenue-history
TSX:LNR Earnings and Revenue History February 10th 2021

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 Linamar'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 Linamar'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. 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 2020, Linamar recorded an accrual ratio of -0.16. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of CA$1.1b in the last year, which was a lot more than its statutory profit of CA$215.8m. Linamar shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Our Take On Linamar's Profit Performance

Happily for shareholders, Linamar produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Linamar's statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the last year. 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. 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. Case in point: We've spotted 3 warning signs for Linamar you should be mindful of and 1 of these can't be ignored.

Today we've zoomed in on a single data point to better understand the nature of Linamar'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.

If you decide to trade Linamar, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted


Valuation is complex, but we're helping make it simple.

Find out whether Linamar is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis