Sats' (OB:SATS) Solid Earnings Are Supported By Other Strong Factors

Sats ASA (OB:SATS) recently posted some strong earnings, and the market responded positively. Our analysis found some more factors that we think are good for shareholders.

See our latest analysis for Sats

Zooming In On Sats' 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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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 June 2024, Sats had an accrual ratio of -0.60. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of kr1.8b during the period, dwarfing its reported profit of kr246.0m. Sats' free cash flow improved over the last year, which is generally good to see.

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.

Our Take On Sats' Profit Performance

Happily for shareholders, Sats produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Sats' statutory profit actually understates its earnings potential! And it's also positive that the company showed enough improvement to book a profit this year, after losing money last year. 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. If you'd like to know more about Sats as a business, it's important to be aware of any risks it's facing. For example - Sats has 1 warning sign we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Sats' profit. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.