The Strong Earnings Posted By Clarkson (LON:CKN) Are A Good Indication Of The Strength Of The Business

By
Simply Wall St
Published
March 15, 2022
LSE:CKN
Source: Shutterstock

Even though Clarkson PLC's (LON:CKN) recent earnings release was robust, the market didn't seem to notice. We think that investors have missed some encouraging factors underlying the profit figures.

See our latest analysis for Clarkson

earnings-and-revenue-history
LSE:CKN Earnings and Revenue History March 15th 2022

Examining Cashflow Against 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Clarkson has an accrual ratio of -0.53 for the year to December 2021. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of UK£107m during the period, dwarfing its reported profit of UK£50.1m. Clarkson's free cash flow improved over the last year, which is generally good to see.

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

Happily for shareholders, Clarkson produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Clarkson'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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Case in point: We've spotted 2 warning signs for Clarkson you should be mindful of and 1 of them is significant.

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

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