FitLife Brands' (NASDAQ:FTLF) Earnings Are Weaker Than They Seem

Investors were disappointed with FitLife Brands, Inc.'s (NASDAQ:FTLF) earnings, despite the strong profit numbers. We did some digging and found some worrying underlying problems.

Check out our latest analysis for FitLife Brands

Examining Cashflow Against FitLife Brands' 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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

FitLife Brands has an accrual ratio of 0.42 for the year to September 2024. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of US$8.39m, a look at free cash flow indicates it actually burnt through US$6.9m in the last year. We saw that FCF was US$14k a year ago though, so FitLife Brands has at least been able to generate positive FCF in the past.

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 FitLife Brands' Profit Performance

As we have made quite clear, we're a bit worried that FitLife Brands didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that FitLife Brands' underlying earnings power is lower than its statutory profit. The silver lining is that its EPS growth over the last year has been really wonderful, even if it's not a perfect measure. 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 FitLife Brands as a business, it's important to be aware of any risks it's facing. You'd be interested to know, that we found 1 warning sign for FitLife Brands and you'll want to know about this.

This note has only looked at a single factor that sheds light on the nature of FitLife Brands' profit. 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. 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.