The Strong Earnings Posted By Intralot Integrated Lottery Systems and Services (ATH:INLOT) Are A Good Indication Of The Strength Of The Business

Intralot S.A. Integrated Lottery Systems and Services (ATH:INLOT) just reported healthy earnings but the stock price didn't move much. Our analysis suggests that investors might be missing some promising details.

See our latest analysis for Intralot Integrated Lottery Systems and Services

Examining Cashflow Against Intralot Integrated Lottery Systems and Services' 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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. 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 2021, Intralot Integrated Lottery Systems and Services had an accrual ratio of -0.15. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of €84m during the period, dwarfing its reported profit of €26.6m. Intralot Integrated Lottery Systems and Services' free cash flow improved over the last year, which is generally good to see. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Intralot Integrated Lottery Systems and Services.

How Do Unusual Items Influence Profit?

Intralot Integrated Lottery Systems and Services' profit was reduced by unusual items worth €4.1m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. In a scenario where those unusual items included non-cash charges, we'd expect to see a strong accrual ratio, which is exactly what has happened in this case. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. If Intralot Integrated Lottery Systems and Services doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

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

Considering both Intralot Integrated Lottery Systems and Services' accrual ratio and its unusual items, we think its statutory earnings are unlikely to exaggerate the company's underlying earnings power. Based on these factors, we think Intralot Integrated Lottery Systems and Services' earnings potential is at least as good as it seems, and maybe even better! If you want to do dive deeper into Intralot Integrated Lottery Systems and Services, you'd also look into what risks it is currently facing. When we did our research, we found 4 warning signs for Intralot Integrated Lottery Systems and Services (2 are concerning!) that we believe deserve your full attention.

After our examination into the nature of Intralot Integrated Lottery Systems and Services' profit, we've come away optimistic for the company. But there is always more to discover if you are capable of focussing your mind on minutiae. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. 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.