We Like The Quality Of Creightons' (LON:CRL) Earnings

Despite posting healthy earnings, Creightons Plc's (LON:CRL ) stock has been quite weak. We have done some analysis, and found some encouraging factors that we believe the shareholders should consider.

See our latest analysis for Creightons

Zooming In On Creightons' 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to September 2023, Creightons had an accrual ratio of -0.11. Therefore, its statutory earnings were quite a lot less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of UK£4.8m, well over the UK£1.18m it reported in profit. Creightons shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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

Our Take On Creightons' Profit Performance

Creightons' accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Creightons' earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 64% over 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 want to do dive deeper into Creightons, you'd also look into what risks it is currently facing. For instance, we've identified 2 warning signs for Creightons (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 Creightons' 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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.

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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.