Conservative accounting at Victorian Plumbing Group (LON:VIC) could explain weak profits
The market ignored the recent earnings report from plc victorian plumbing group (LON:VIC), despite weak earnings. Our analysis suggests that investors may have noticed promising signs beyond the statutory earnings numbers.
See our latest review for Victorian Plumbing Group
A closer look at the benefits of Victorian Plumbing Group
A key financial ratio used to measure a company’s ability to convert earnings into free cash flow (FCF) is the exercise ratio. Put simply, this ratio subtracts FCF from net income and divides that number by the company’s average operating assets over that period. You can think of the cash flow equalization ratio as the “non-FCF profit ratio”.
Therefore, a negative accrual ratio is positive for the company and a positive accrual ratio is negative. This doesn’t mean that we should worry about a positive accumulation ratio, but it should be noted where the accumulation ratio is rather high. To quote a 2014 paper by Lewellen and Resutek, “Companies with higher accrued liabilities tend to be less profitable in the future.”
For the year to March 2022, Victorian Plumbing Group had a strike ratio of -1.84. Consequently, its statutory result was significantly lower than its free cash flow. Indeed, over the past twelve months it has reported free cash flow of £8.2m, well above the £4.70m it reported as profit. Victorian Plumbing Group has seen its free cash flow drop year on year, which is less than ideal, like an episode of Simpsons without Groundskeeper Willie. That said, there is more to the story. It can be seen that unusual elements have impacted its statutory profit, and therefore the growth ratio.
This might make you wonder what analysts predict in terms of future profitability. Luckily, you can click here to see an interactive chart outlining future profitability, based on their estimates.
The impact of unusual items on earnings
Victorian Plumbing Group’s profit was reduced by unusual items worth £8.8 million over the last twelve months, helping it to produce a strong cash conversion, as evidenced by its unusual items. This is what you would expect to see when a company has a non-monetary charge reducing paper profits. While deductions due to unusual items are disappointing at first, there is a silver lining. We have reviewed thousands of listed companies and found that unusual items are very often unique in nature. And, after all, that’s exactly what accounting terminology implies. In the twelve months to March 2022, Victorian Plumbing Group had a large outlay of unusual items. All other things being equal, this would likely have the effect of making the statutory profit worse than its underlying earning capacity.
Our view on the earnings performance of Victorian Plumbing Group
Given both Victorian Plumbing Group’s strike ratio and its unusual items, we believe its statutory earnings should not overstate the underlying earning power of the business. After looking at all of this, we feel that Victorian Plumbing Group’s statutory profit probably underestimates its earning potential! Keep in mind that when it comes to analyzing a stock, it is worth noting the risks involved. During our analysis, we discovered that Victorian Plumbing Group had 3 warning signs and it would be unwise to ignore them.
After our review of the nature of Victorian Plumbing Group’s earnings, we emerged optimistic for the business. But there are many other ways to inform your opinion about a company. For example, many people view a high return on equity as an indication of a favorable trading economy, while others like to “follow the money” and look for stocks that insiders buy. So you might want to see this free collection of companies offering a high return on equity, or this list of stocks that insiders buy.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.