Here's Why American Public Education's (NASDAQ:APEI) Statutory Earnings Are Arguably Too Conservative

By
Simply Wall St
Published
December 17, 2020

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. That said, the current statutory profit is not always a good guide to a company's underlying profitability. In this article, we'll look at how useful this year's statutory profit is, when analysing American Public Education (NASDAQ:APEI).

It's good to see that over the last twelve months American Public Education made a profit of US$17.5m on revenue of US$310.3m. The chart below shows how it has grown revenue over the last three years, but that profit has declined.

View our latest analysis for American Public Education

NasdaqGS:APEI Earnings and Revenue History December 17th 2020

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. Today, we'll discuss American Public Education'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.

A Closer Look At American Public Education'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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. 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 September 2020, American Public Education had an accrual ratio of -0.32. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of US$44m in the last year, which was a lot more than its statutory profit of US$17.5m. American Public Education's free cash flow improved over the last year, which is generally good to see.

Our Take On American Public Education's Profit Performance

Happily for shareholders, American Public Education produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that American Public Education's statutory profit actually understates its earnings potential! And the EPS is up 43% over the last twelve months. 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. 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. At Simply Wall St, we found 1 warning sign for American Public Education and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of American Public Education's 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 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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