Are Flanigan's Enterprises's (NYSEMKT:BDL) Statutory Earnings A Good Reflection Of Its Earnings Potential?

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. This article will consider whether Flanigan's Enterprises' (NYSEMKT:BDL) statutory profits are a good guide to its underlying earnings.

While Flanigan's Enterprises was able to generate revenue of US$113.6m in the last twelve months, we think its profit result of US$1.60m was more important. While it managed to grow its revenue over the last three years, its profit has moved in the other direction, as you can see in the chart below.

View our latest analysis for Flanigan's Enterprises

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 Flanigan's Enterprises' free cashflow relative to its earnings, and consider what that tells us about the company. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Flanigan's Enterprises.

Zooming In On Flanigan's Enterprises' Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. 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.

Flanigan's Enterprises has an accrual ratio of -0.13 for the year to June 2020. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of US$7.2m in the last year, which was a lot more than its statutory profit of US$1.60m. Flanigan's Enterprises' free cash flow improved over the last year, which is generally good to see.

Our Take On Flanigan's Enterprises' Profit Performance

As we discussed above, Flanigan's Enterprises has perfectly satisfactory free cash flow relative to profit. Because of this, we think Flanigan's Enterprises' earnings potential is at least as good as it seems, and maybe even better! On the other hand, its EPS actually shrunk in the last twelve months. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. To that end, you should learn about the 4 warning signs we've spotted with Flanigan's Enterprises (including 1 which shouldn't be ignored).

This note has only looked at a single factor that sheds light on the nature of Flanigan's Enterprises' 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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