Clarkson's (LON:CKN) Conservative Accounting Might Explain Soft Earnings

Investors were disappointed with the weak earnings posted by Clarkson PLC (LON:CKN ). While the headline numbers were soft, we believe that investors might be missing some encouraging factors.

View our latest analysis for Clarkson

Zooming In On Clarkson'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. 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.

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

Clarkson has an accrual ratio of -0.16 for the year to June 2024. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of UK£103m during the period, dwarfing its reported profit of UK£82.3m. Clarkson's free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.

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 Clarkson's Profit Performance

As we discussed above, Clarkson has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Clarkson's statutory profit actually understates its earnings potential! 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. So while earnings quality is important, it's equally important to consider the risks facing Clarkson at this point in time. Every company has risks, and we've spotted 1 warning sign for Clarkson you should know about.

This note has only looked at a single factor that sheds light on the nature of Clarkson's profit. 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. 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 with significant insider holdings 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.