Shareholders Can Be Confident That Wingstop's (NASDAQ:WING) Earnings Are High Quality

Investors were underwhelmed by the solid earnings posted by Wingstop Inc. (NASDAQ:WING) recently. We did some digging and actually think they are being unnecessarily pessimistic.

See our latest analysis for Wingstop

A Closer Look At Wingstop's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. 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.

Wingstop has an accrual ratio of -0.23 for the year to September 2024. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of US$140m during the period, dwarfing its reported profit of US$100.8m. Wingstop's 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 Wingstop's Profit Performance

As we discussed above, Wingstop's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Wingstop's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Better yet, its EPS are growing strongly, which is nice to see. 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 want to do dive deeper into Wingstop, you'd also look into what risks it is currently facing. Case in point: We've spotted 3 warning signs for Wingstop you should be mindful of and 1 of these shouldn't be ignored.

This note has only looked at a single factor that sheds light on the nature of Wingstop's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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.