Ironwood Pharmaceuticals (NASDAQ:IRWD) Is Posting Promising Earnings But The Good News Doesn’t Stop There

The market seemed underwhelmed by the solid earnings posted by Ironwood Pharmaceuticals, Inc. (NASDAQ:IRWD) recently. We have done some analysis, and found some encouraging factors that we believe the shareholders should consider.

See our latest analysis for Ironwood Pharmaceuticals

Zooming In On Ironwood Pharmaceuticals' 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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Ironwood Pharmaceuticals has an accrual ratio of -0.58 for the year to June 2024. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of US$146m in the last year, which was a lot more than its statutory profit of US$9.21m. Ironwood Pharmaceuticals' free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.

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 Ironwood Pharmaceuticals' Profit Performance

Happily for shareholders, Ironwood Pharmaceuticals produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Ironwood Pharmaceuticals' 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. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you'd like to know more about Ironwood Pharmaceuticals as a business, it's important to be aware of any risks it's facing. For example, we've found that Ironwood Pharmaceuticals has 5 warning signs (1 is a bit unpleasant!) 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 Ironwood Pharmaceuticals' 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. 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 with significant insider holdings 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.