Focus Home Interactive Société anonyme's (EPA:ALFOC) Earnings Are Growing But Is There More To The Story?

Statistically speaking, it is less risky to invest in profitable companies than in 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 Focus Home Interactive Société anonyme (EPA:ALFOC).

While Focus Home Interactive Société anonyme was able to generate revenue of €142.8m in the last twelve months, we think its profit result of €13.0m was more important. One positive is that it has grown both its profit and its revenue, over the last few years.

Check out our latest analysis for Focus Home Interactive Société anonyme

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. Today, we'll discuss Focus Home Interactive Société anonyme's free cashflow relative to its earnings, and consider what that tells us about the company. 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 Focus Home Interactive Société anonyme's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Focus Home Interactive Société anonyme has an accrual ratio of 0.35 for the year to March 2020. We can therefore deduce that its free cash flow fell well short of covering its statutory profit, suggesting we might want to think twice before putting a lot of weight on the latter. In fact, it had free cash flow of €2.1m in the last year, which was a lot less than its statutory profit of €13.0m. Focus Home Interactive Société anonyme shareholders will no doubt be hoping that its free cash flow bounces back next year, since it was down over the last twelve months. One positive for Focus Home Interactive Société anonyme shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

Our Take On Focus Home Interactive Société anonyme's Profit Performance

As we discussed above, we think Focus Home Interactive Société anonyme's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Focus Home Interactive Société anonyme's underlying earnings power is lower than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So while earnings quality is important, it's equally important to consider the risks facing Focus Home Interactive Société anonyme at this point in time. For instance, we've identified 2 warning signs for Focus Home Interactive Société anonyme (1 shouldn't be ignored) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of Focus Home Interactive Société anonyme'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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