Although Leaf Mobile Inc (TSE: LEAF) recently posted strong earnings, the stock has not reacted significantly. We decided to take a closer look and think investors might be concerned about several of the factors of concern that we have discovered.
Check out our latest review for Leaf Mobile
A closer look at Leaf Mobile’s revenue
Many investors haven’t heard of cash flow adjustment ratio, but it’s actually a useful measure of the extent to which a company’s profit is supported by Free Cash Flow (FCF) over a given period. The accrual ratio subtracts the FCF from the profit for a given period and divides the profit by the company’s average operating assets over that period. You might think of the Cash Flow Regulating Ratio as the “Profit Ratio without FCF”.
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 a regularization ratio greater than zero is of little concern, we think it’s worth noting when a company has a relatively high regularization ratio. To quote an article published in 2014 by Lewellen and Resutek, “Companies with higher accrued liabilities tend to be less profitable in the future.”
Leaf Mobile has an accruals ratio of 0.81 for the year through March 2021. Ergo, its free cash flow is significantly lower than its profit. Typically, this bodes poorly for future profitability. Namely, it produced free cash flow of C $ 8.1 million during the period, well below its reported profit of C $ 18.0 million. We note, however, that Leaf Mobile has increased its free cash flow over the past year. However, that is not all to consider. The accruals ratio reflects, at least in part, the impact of unusual items on the statutory result.
To note: we always recommend that investors check the strength of their balance sheets. Click here to access our analysis of Leaf Mobile’s balance sheet.
The impact of unusual items on profit
Considering the build-up ratio, it’s not too surprising that Leaf Mobile’s earnings have been boosted by unusual items worth C $ 13 million over the past twelve months. While it’s always nice to have higher profits, a large contribution of unusual items sometimes dampens our enthusiasm. When we analyzed the numbers of thousands of publicly traded companies, we found that an increase in unusual items in any given year is often do not repeated the following year. And that’s as you might expect, given that these improvements are described as “unusual”. We can see that Leaf Mobile’s positive unusual items were quite large compared to its profit for the year through March 2021. As a result, we can assume that the unusual items make its statutory profit much higher than it is. would not be otherwise.
Our take on Leaf Mobile’s profit performance
In summary, Leaf Mobile received a good boost to take advantage of unusual items, but could not match its paper profit with free cash flow. For all the reasons discussed above, we believe that at a glance, Leaf Mobile’s statutory earnings could be considered low quality, as they are likely to give investors an overly positive impression of the company. . So while the quality of income is important, it is just as important to consider the risks Leaf Mobile faces at this point. When we did our research we found 2 warning signs for Leaf Mobile (1 is a bit rude!) Which in our opinion deserves your full attention.
Our review of Leaf Mobile focused on some factors that can make its earnings better than they are. And, on that basis, we are somewhat skeptical. But there is always more to be discovered if you are able to focus your mind on the minutiae. For example, many people see a high return on equity as an indication of a favorable business economy, while others like to “follow the money” and look for stocks that insiders are buying. Then you might want to see this free collection of companies offering a high return on equity, or that list of stocks bought by insiders.
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