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. Today we’ll focus on whether this year’s statutory profits are a good guide to understanding TAS Tecnologia Avanzata dei Sistemi (BIT:TAS).
It’s good to see that over the last twelve months TAS Tecnologia Avanzata dei Sistemi made a profit of €1.24m on revenue of €49.8m. The chart below shows that revenue has improved over the last three years, and, even better, the company has moved from unprofitable to profitable.
Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. Therefore, we think it’s worth taking a closer look at TAS Tecnologia Avanzata dei Sistemi’s cashflow, as well as examining the impact that unusual items have had on its reported profit. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of TAS Tecnologia Avanzata dei Sistemi.
A Closer Look At TAS Tecnologia Avanzata dei Sistemi’s Earnings
One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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.
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. 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”.
TAS Tecnologia Avanzata dei Sistemi has an accrual ratio of -0.14 for the year to September 2019. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of €4.9m, well over the €1.24m it reported in profit. Notably, TAS Tecnologia Avanzata dei Sistemi had negative free cash flow last year, so the €4.9m it produced this year was a welcome improvement. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.
The Impact Of Unusual Items On Profit
Surprisingly, given TAS Tecnologia Avanzata dei Sistemi’s accrual ratio implied strong cash conversion, its paper profit was actually boosted by €162k in unusual items. We can’t deny that higher profits generally leave us optimistic, but we’d prefer it if the profit were to be sustainable. We ran the numbers on most publicly listed companies worldwide, and it’s very common for unusual items to be once-off in nature. And, after all, that’s exactly what the accounting terminology implies. Assuming those unusual items don’t show up again in the current year, we’d thus expect profit to be weaker next year (in the absence of business growth, that is).
Our Take On TAS Tecnologia Avanzata dei Sistemi’s Profit Performance
In conclusion, TAS Tecnologia Avanzata dei Sistemi’s accrual ratio suggests its statutory earnings are of good quality, but on the other hand the profits were boosted by unusual items. Considering the aforementioned, we think that TAS Tecnologia Avanzata dei Sistemi’s profits are probably a reasonable reflection of its underlying profitability; although we’d be confident in that conclusion if we saw a cleaner set of results. While earnings are important, another area to consider is the balance sheet. You can seeour latest analysis on TAS Tecnologia Avanzata dei Sistemi’s balance sheet health here.
Our examination of TAS Tecnologia Avanzata dei Sistemi has focussed on certain factors that can make its earnings look better than they are. 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 that insiders are buying to be useful.
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