We're Not So Sure You Should Rely on Norway Royal Salmon's (OB:NRS) Statutory Earnings

As a general rule, we think profitable companies are less risky than companies that lose money. That said, the current statutory profit is not always a good guide to a company's underlying profitability. Today we'll focus on whether this year's statutory profits are a good guide to understanding Norway Royal Salmon (OB:NRS).

It's good to see that over the last twelve months Norway Royal Salmon made a profit of kr438.4m on revenue of kr5.46b. The chart below shows how it has grown revenue over the last three years, but that profit has declined.

Check out our latest analysis for Norway Royal Salmon

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. So today we'll look at what Norway Royal Salmon's cashflow and unusual items tell us about the quality of its earnings. 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 Norway Royal Salmon'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Norway Royal Salmon has an accrual ratio of 0.35 for the year to September 2020. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. Over the last year it actually had negative free cash flow of kr824m, in contrast to the aforementioned profit of kr438.4m. We also note that Norway Royal Salmon's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of kr824m. 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.

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that Norway Royal Salmon's profit was boosted by unusual items worth kr195m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that Norway Royal Salmon's positive unusual items were quite significant relative to its profit in the year to September 2020. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Norway Royal Salmon's Profit Performance

Summing up, Norway Royal Salmon received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. Considering all this we'd argue Norway Royal Salmon's profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about Norway Royal Salmon as a business, it's important to be aware of any risks it's facing. At Simply Wall St, we found 1 warning sign for Norway Royal Salmon and we think they deserve your attention.

Our examination of Norway Royal Salmon has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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. 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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