Although Dusk Group Limited (ASX: DSK) The recent earnings release was solid, the market didn’t seem to notice. Investors are probably missing some underlying factors that are encouraging for the future of the business.
See our latest analysis for Dusk Group
Review of Dusk Group Cash Flow vs. Profit
As finance nerds already know, the cash flow adjustment ratio is a key metric for assessing how well a business’s free cash flow (FCF) matches its profits. To get the accrual ratio, we first subtract FCF from earnings for a period and then divide that number by the average operating assets for the period. This ratio tells us to what extent a company’s earnings are not supported by free cash flow.
This means that a negative accrual ratio is a good thing, because it shows that the company is generating more free cash flow than its profits suggest. While having an accumulation ratio greater than zero is of little concern, we believe it is worth noting when a company has a relatively high accumulation ratio. Notably, some academic evidence suggests that a high accumulation ratio is a bad sign for short-term profits, in general.
For the twelve months ended June 2021, Dusk Group recorded a accrual ratio of -0.46. Consequently, its statutory result was significantly lower than its free cash flow. Namely, it generated free cash flow of A $ 31 million during the period, eclipsing its reported profit of A $ 21.9 million. Dusk Group shareholders are undoubtedly satisfied with the improvement in free cash flow over the past twelve months.
This might make you wonder what analysts are predicting in terms of future profitability. Fortunately, you can click here to see an interactive graph depicting future profitability, based on their estimates.
Our point of view on the earnings performance of the Dusk group
As we saw above, Dusk Group’s accumulation ratio indicates a strong conversion of earnings to free cash flow, which is positive for the company. Based on this observation, we consider that it is possible that the statutory profit of Dusk Group in fact underestimates its earning potential! And on top of that, its earnings per share have grown at an extremely impressive rate over the past year. The aim of this article was to assess how well we can rely on statutory profits to reflect the potential of the business, but there is much more to consider. If you want to dive deeper into Dusk Group, you will also take a look at the risks it currently faces. For example, we discovered 2 warning signs that you should run your eye to get a better picture of Dusk Group.
Today, we zoomed in on a single data point to better understand the nature of Dusk Group profits. But there is always more to be discovered if you are able to focus your mind on the smallest details. Some people consider a high return on equity to be a good sign of a quality business. Although it may take a bit of research on your behalf, you can find this free a set of companies offering a high return on equity, or that list of stocks that insiders buy to be useful.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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