Some May Be Optimistic About Intralot Integrated Lottery Systems and Services' (ATH:INLOT) Earnings

A lackluster earnings announcement from Intralot S.A. Integrated Lottery Systems and Services (ATH:INLOT) last week didn't sink the stock price. However, we believe that investors should be aware of some underlying factors which may be of concern.

Check out our latest analysis for Intralot Integrated Lottery Systems and Services

Zooming In On Intralot Integrated Lottery Systems and Services' 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. 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. 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to December 2023, Intralot Integrated Lottery Systems and Services had an accrual ratio of -0.21. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of €83m during the period, dwarfing its reported profit of €5.84m. Intralot Integrated Lottery Systems and Services' free cash flow improved over the last year, which is generally good to see. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings.

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.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, Intralot Integrated Lottery Systems and Services increased the number of shares on issue by 63% over the last twelve months by issuing new shares. That means its earnings are split among a greater number of shares. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. Check out Intralot Integrated Lottery Systems and Services' historical EPS growth by clicking on this link.

A Look At The Impact Of Intralot Integrated Lottery Systems and Services' Dilution On Its Earnings Per Share (EPS)

Intralot Integrated Lottery Systems and Services was losing money three years ago. And even focusing only on the last twelve months, we see profit is down 7.7%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 45% in the same period. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

If Intralot Integrated Lottery Systems and Services' EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

Our Take On Intralot Integrated Lottery Systems and Services' Profit Performance

In conclusion, Intralot Integrated Lottery Systems and Services has a strong cashflow relative to earnings, which indicates good quality earnings, but the dilution means its earnings per share are dropping faster than its profit. Based on these factors, it's hard to tell if Intralot Integrated Lottery Systems and Services' profits are a reasonable reflection of its underlying profitability. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. While conducting our analysis, we found that Intralot Integrated Lottery Systems and Services has 2 warning signs and it would be unwise to ignore these.

Our examination of Intralot Integrated Lottery Systems and Services 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. 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.