Broadly speaking, profitable businesses are less risky than unprofitable ones. That said, the current statutory profit is not always a good guide to a company’s underlying profitability. This article will consider whether Lagercrantz Group’s (STO:LAGR B) statutory profits are a good guide to its underlying earnings.
We like the fact that Lagercrantz Group made a profit of kr357.0m on its revenue of kr4.11b, in the last year. One positive is that it has grown both its profit and its revenue, over the last few years.
Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. As a result, we think it’s well worth considering what Lagercrantz Group’s cashflow (when compared to its earnings) can tell us about the nature of its statutory profit. 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.
Zooming In On Lagercrantz Group’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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company’s average operating assets over that period. You could think of the accrual ratio from cashflow as the ‘non-FCF profit ratio’.
That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. That is not intended to imply we should worry about a positive accrual ratio, but it’s worth noting where the accrual ratio is rather high. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
Over the twelve months to September 2020, Lagercrantz Group recorded an accrual ratio of -0.14. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of kr563m during the period, dwarfing its reported profit of kr357.0m. Lagercrantz Group’s free cash flow improved over the last year, which is generally good to see.
Our Take On Lagercrantz Group’s Profit Performance
As we discussed above, Lagercrantz Group has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Lagercrantz Group’s statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 30% per year over the last three years. 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. Keep in mind, when it comes to analysing a stock it’s worth noting the risks involved. In terms of investment risks, we’ve identified 2 warning signs with Lagercrantz Group, and understanding them should be part of your investment process.
Today we’ve zoomed in on a single data point to better understand the nature of Lagercrantz Group’s profit. But there are plenty of other ways to inform your opinion of a company. 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 that insiders are buying.
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This article by Simply Wall St is general in nature. 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.
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