Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether As Commercial Industrial Company of Computers and Toys' (ATH:ASCO) statutory profits are a good guide to its underlying earnings.
It's good to see that over the last twelve months As Commercial Industrial Company of Computers and Toys made a profit of €1.71m on revenue of €20.4m. Below, you can see that both its revenue and its profit have fallen over the last three years.
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, today we're going to take a closer look at As Commercial Industrial Company of Computers and Toys' cashflow, and unusual items, with a view to understanding what these might tell us about its statutory profit. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of As Commercial Industrial Company of Computers and Toys.
A Closer Look At As Commercial Industrial Company of Computers and Toys' 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). To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
For the year to June 2020, As Commercial Industrial Company of Computers and Toys had an accrual ratio of -0.13. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. To wit, it produced free cash flow of €3.7m during the period, dwarfing its reported profit of €1.71m. As Commercial Industrial Company of Computers and Toys shareholders are no doubt pleased that free cash flow improved over the last twelve months. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.
How Do Unusual Items Influence Profit?
While the accrual ratio might bode well, we also note that As Commercial Industrial Company of Computers and Toys' profit was boosted by unusual items worth €179k in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. If As Commercial Industrial Company of Computers and Toys doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.
Our Take On As Commercial Industrial Company of Computers and Toys' Profit Performance
As Commercial Industrial Company of Computers and Toys' profits got a boost from unusual items, which indicates they might not be sustained and yet its accrual ratio still indicated solid cash conversion, which is promising. Considering the aforementioned, we think that As Commercial Industrial Company of Computers and Toys' profits are probably a reasonable reflection of its underlying profitability; although we'd be confident in that conclusion if we saw a cleaner set of results. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. You'd be interested to know, that we found 2 warning signs for As Commercial Industrial Company of Computers and Toys and you'll want to know about these.
Our examination of As Commercial Industrial Company of Computers and Toys has focussed on certain factors that can make its earnings look better than they are. 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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