AnaptysBio's (NASDAQ:ANAB) Performance Is Even Better Than Its Earnings Suggest

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

View our latest analysis for AnaptysBio

A Closer Look At AnaptysBio's 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). 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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to September 2021, AnaptysBio had an accrual ratio of -0.44. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of US$15m during the period, dwarfing its reported profit of US$8.39m. Given that AnaptysBio had negative free cash flow in the prior corresponding period, the trailing twelve month resul of US$15m would seem to be a step in the right direction.

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 AnaptysBio's Profit Performance

Happily for shareholders, AnaptysBio produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think AnaptysBio's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And one can definitely find a positive in the fact that it made a profit this year, despite losing money last year. 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. If you'd like to know more about AnaptysBio as a business, it's important to be aware of any risks it's facing. For example, we've found that AnaptysBio has 2 warning signs (1 can't be ignored!) that deserve your attention before going any further with your analysis.

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

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.