We Like The Quality Of Mulberry Group's (LON:MUL) Earnings

By
Simply Wall St
Published
July 27, 2021
AIM:MUL
Source: Shutterstock

Mulberry Group plc's (LON:MUL) healthy profit numbers didn't contain any surprises for investors. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.

View our latest analysis for Mulberry Group

earnings-and-revenue-history
AIM:MUL Earnings and Revenue History July 28th 2021

Examining Cashflow Against Mulberry Group'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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Mulberry Group has an accrual ratio of -0.66 for the year to March 2021. Therefore, its statutory earnings were very significantly less than its free cashflow. 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£4.77m. Mulberry Group's free cash flow improved over the last year, which is generally good to see. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Mulberry Group.

The Impact Of Unusual Items On Profit

Surprisingly, given Mulberry Group's accrual ratio implied strong cash conversion, its paper profit was actually boosted by UK£3.6m in unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that Mulberry Group's positive unusual items were quite significant relative to its profit in the year to March 2021. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Mulberry Group's Profit Performance

In conclusion, Mulberry Group's accrual ratio suggests its statutory earnings are of good quality, but on the other hand the profits were boosted by unusual items. Given the contrasting considerations, we don't have a strong view as to whether Mulberry Group's profits are an apt reflection of its underlying potential for profit. 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. For example - Mulberry Group has 2 warning signs we think you should be aware of.

Our examination of Mulberry Group has focussed on certain factors that can make its earnings look better than they are. But there are plenty of other ways to inform your opinion of a company. 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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