Are Unitronics (1989) (RG)'s (TLV:UNIT) Statutory Earnings A Good Reflection Of Its Earnings Potential?

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. Today we'll focus on whether this year's statutory profits are a good guide to understanding Unitronics (1989) (RG) (TLV:UNIT).

While Unitronics (1989) (RG) was able to generate revenue of ₪127.9m in the last twelve months, we think its profit result of ₪12.1m was more important. The chart below shows that while revenue has fallen over the last three years, the company has moved from unprofitable to profitable.

Check out our latest analysis for Unitronics (1989) (RG)

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. As a result, we think it's well worth considering what Unitronics (1989) (RG)'s cashflow (when compared to its earnings) can tell us about the nature of its statutory profit. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Unitronics (1989) (RG).

Zooming In On Unitronics (1989) (RG)'s 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Unitronics (1989) (RG) has an accrual ratio of -0.13 for the year to September 2020. Therefore, its statutory earnings were quite a lot less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of ₪22m, well over the ₪12.1m it reported in profit. Unitronics (1989) (RG) shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Our Take On Unitronics (1989) (RG)'s Profit Performance

As we discussed above, Unitronics (1989) (RG) has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Unitronics (1989) (RG)'s statutory profit actually understates its earnings potential! And the EPS is up 16% over 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For example - Unitronics (1989) (RG) 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 Unitronics (1989) (RG)'s profit. But there are plenty of other ways to inform your opinion of a company. 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. 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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This article by Simply Wall St is general in nature. 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.
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