We Like Corcept Therapeutics' (NASDAQ:CORT) Earnings For More Than Just Statutory Profit

The market seemed underwhelmed by the solid earnings posted by Corcept Therapeutics Incorporated (NASDAQ:CORT) recently. Our analysis suggests that there are some reasons for hope that investors should be aware of.

See our latest analysis for Corcept Therapeutics

Examining Cashflow Against Corcept Therapeutics' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Corcept Therapeutics has an accrual ratio of -0.21 for the year to December 2023. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of US$127m in the last year, which was a lot more than its statutory profit of US$105.5m. Corcept Therapeutics' 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 Corcept Therapeutics' Profit Performance

Happily for shareholders, Corcept Therapeutics produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Corcept Therapeutics' statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 11% per year over the last three years. 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. So while earnings quality is important, it's equally important to consider the risks facing Corcept Therapeutics at this point in time. In terms of investment risks, we've identified 1 warning sign with Corcept Therapeutics, and understanding it should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Corcept Therapeutics' 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. 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.

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

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.