We're Not So Sure You Should Rely on FP Newspapers's (CVE:FP) Statutory Earnings

Broadly speaking, profitable businesses are less risky than 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. Today we'll focus on whether this year's statutory profits are a good guide to understanding FP Newspapers (CVE:FP).

It's good to see that over the last twelve months FP Newspapers made a profit of CA$2.22m on revenue of CA$3.30m. The chart below shows that revenue has improved over the last three years, and, even better, the company has moved from unprofitable to profitable.

View our latest analysis for FP Newspapers

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. Today, we'll discuss FP Newspapers' free cashflow relative to its earnings, and consider what that tells us about the company. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of FP Newspapers.

Examining Cashflow Against FP Newspapers' 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to September 2020, FP Newspapers recorded an accrual ratio of 0.42. Ergo, its free cash flow is significantly weaker than its profit. As a general rule, that bodes poorly for future profitability. In fact, it had free cash flow of CA$46k in the last year, which was a lot less than its statutory profit of CA$2.22m. Given that FP Newspapers had negative free cash flow in the prior corresponding period, the trailing twelve month resul of CA$46k would seem to be a step in the right direction.

Our Take On FP Newspapers' Profit Performance

As we discussed above, we think FP Newspapers' earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that FP Newspapers' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The good news is that, its earnings per share increased by 68% 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 FP Newspapers, you'd also look into what risks it is currently facing. When we did our research, we found 4 warning signs for FP Newspapers (3 are a bit concerning!) that we believe deserve your full attention.

This note has only looked at a single factor that sheds light on the nature of FP Newspapers' 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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