Safestyle UK's (LON:SFE) Robust Earnings Are Supported By Other Strong Factors

Safestyle UK plc (LON:SFE) just reported healthy earnings but the stock price didn't move much. Investors are probably missing some underlying factors which are encouraging for the future of the company.

See our latest analysis for Safestyle UK

Examining Cashflow Against Safestyle UK'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. 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. The ratio shows us how much a company's profit exceeds its FCF.

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. 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.

Safestyle UK has an accrual ratio of -0.39 for the year to July 2021. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of UK£12m in the last year, which was a lot more than its statutory profit of UK£3.50m. Safestyle UK shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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.

Our Take On Safestyle UK's Profit Performance

As we discussed above, Safestyle UK's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Safestyle UK's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And it's also positive that the company showed enough improvement to book a profit this year, after losing money 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 Safestyle UK, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 1 warning sign for Safestyle UK you should know about.

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

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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