Stock Analysis

Here's Why Robert Walters' (LON:RWA) Statutory Earnings Are Arguably Too Conservative

LSE:RWA
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Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. 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. This article will consider whether Robert Walters' (LON:RWA) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months Robert Walters made a profit of UK£21.6m on revenue of UK£1.08b. In the last few years both its revenue and its profit have fallen, as you can see in the chart below.

Check out our latest analysis for Robert Walters

earnings-and-revenue-history
LSE:RWA Earnings and Revenue History February 9th 2021

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 Robert Walters' cashflow (when compared to its earnings) can tell us about the nature of its statutory profit. 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 Robert Walters' 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'.

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. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Robert Walters has an accrual ratio of -0.88 for the year to June 2020. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of UK£87m, well over the UK£21.6m it reported in profit. Robert Walters' free cash flow improved over the last year, which is generally good to see.

Our Take On Robert Walters' Profit Performance

As we discussed above, Robert Walters' accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Robert Walters' underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! On the other hand, its EPS actually shrunk in the last twelve months. 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. If you'd like to know more about Robert Walters as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 3 warning signs for Robert Walters you should know about.

This note has only looked at a single factor that sheds light on the nature of Robert Walters' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. 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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