Here's Why We Think De'Longhi's (BIT:DLG) Statutory Earnings Might Be Conservative

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. 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. This article will consider whether De'Longhi's (BIT:DLG) statutory profits are a good guide to its underlying earnings.

While De'Longhi was able to generate revenue of €2.26b in the last twelve months, we think its profit result of €193.2m was more important. One positive is that it has grown both its profit and its revenue, over the last few years.

View our latest analysis for De'Longhi

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. Today, we'll discuss De'Longhi's 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.

Zooming In On De'Longhi's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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'.

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. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

De'Longhi has an accrual ratio of -0.24 for the year to September 2020. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of €422m during the period, dwarfing its reported profit of €193.2m. De'Longhi's free cash flow improved over the last year, which is generally good to see.

Our Take On De'Longhi's Profit Performance

Happily for shareholders, De'Longhi produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think De'Longhi's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 8.4% annually, over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So while earnings quality is important, it's equally important to consider the risks facing De'Longhi at this point in time. For example - De'Longhi 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 De'Longhi'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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