We Think RPM International's (NYSE:RPM) Profit Is Only A Baseline For What They Can Achieve

Investors were underwhelmed by the solid earnings posted by RPM International Inc. (NYSE:RPM) recently. Our analysis says that investors should be optimistic, as the strong profit is built on solid foundations.

See our latest analysis for RPM International

Zooming In On RPM International'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. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

RPM International has an accrual ratio of -0.11 for the year to February 2024. 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$1.0b in the last year, which was a lot more than its statutory profit of US$556.7m. RPM International shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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 RPM International's Profit Performance

As we discussed above, RPM International has perfectly satisfactory free cash flow relative to profit. Because of this, we think RPM International's earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 24% annually, over the last three years. 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. So while earnings quality is important, it's equally important to consider the risks facing RPM International at this point in time. Case in point: We've spotted 2 warning signs for RPM International you should be aware of.

This note has only looked at a single factor that sheds light on the nature of RPM International's profit. But there are plenty of other ways to inform your opinion of a company. 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. 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. 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.