Stock Analysis

Here's Why We Think Plaisio Computers's (ATH:PLAIS) Statutory Earnings Might Be Conservative

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ATSE:PLAIS
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It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. In this article, we'll look at how useful this year's statutory profit is, when analysing Plaisio Computers (ATH:PLAIS).

We like the fact that Plaisio Computers made a profit of €2.10m on its revenue of €328.2m, in the last year. As you can see in the chart below, its profit has declined over the last three years, even though its revenue has increased.

Check out our latest analysis for Plaisio Computers

earnings-and-revenue-history
ATSE:PLAIS Earnings and Revenue History December 29th 2020

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. Today, we'll discuss Plaisio Computers' free cashflow relative to its earnings, and consider what that tells us about the company. 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.

A Closer Look At Plaisio Computers' 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. 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. 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".

Over the twelve months to June 2020, Plaisio Computers recorded an accrual ratio of -0.25. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of €20m during the period, dwarfing its reported profit of €2.10m. Given that Plaisio Computers had negative free cash flow in the prior corresponding period, the trailing twelve month resul of €20m would seem to be a step in the right direction.

Our Take On Plaisio Computers' Profit Performance

As we discussed above, Plaisio Computers' accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that Plaisio Computers' statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example - Plaisio Computers has 2 warning signs we think you should be aware of.

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