The earnings of QUIZ (LON: QUIZ) are based on flexible bases
QUIZ plc (LON: QUIZ) posted decent profits, but shareholders did not react strongly. Our analysis found disturbing factors that weaken the profit base.
Check out our latest analysis for QUIZ
Review of cash flow vs. income from QUIZ
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. You could think of the accumulation ratio from cash flow as the “non FCF profit ratio”.
Therefore, a negative accumulation ratio is positive for the company and a positive accumulation ratio is negative. This is not to say that we should be worried about a positive accumulation ratio, but it should be noted where the accumulation ratio is rather high. This is because some academic studies have suggested that high accrual ratios tend to lead to lower profits or lower earnings growth.
In the twelve months up to March 2021, QUIZ recorded an accrual ratio of 0.98. Statistically speaking, this is really negative for future income. And indeed, during the period, the company produced no free cash flow. Even though it reported a profit of £ 6.21million, a free cash flow review indicates that it has actually burned £ 2.8million in the past year. It’s worth noting that QUIZ generated a positive FCF of £ 6.1million a year ago, so at least they have in the past. However, that’s not all there is to consider. We note that unusual elements have impacted its statutory result, and therefore the accrual ratio. A positive point for QUIZ shareholders is that its accumulation ratio was significantly better last year, giving reason to believe that it could revert to a stronger cash conversion in the future. As a result, some shareholders may seek a higher cash conversion during the current year.
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.
How do unusual items influence profit?
Considering the build-up ratio, it’s not too surprising that QUIZ’s profit has been boosted by unusual items worth £ 24million 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 a boost of unusual items in any given year is often not repeated the following year. And, after all, that’s exactly what accounting terminology implies. We can see that the unusual positive elements of QUIZ were quite large compared to its profit until March 2021. All other things being equal, this would likely have the effect of making statutory profit a poor indicator of sub-profit power. underlying.
Our take on QUIZ’s profit performance
QUIZ had a low accrual ratio, but its profit was boosted by unusual items. For all of the above reasons, we believe that at first glance, QUIZ’s statutory profits could be considered low quality, as they are likely to give investors an overly positive impression of the company. If you want to learn more about QUIZ as a business, it is important to be aware of the risks it faces. To this end, you should inquire about the 3 warning signs we spotted with QUIZ (including 1 which cannot be ignored).
Our QUIZ review focused on some factors that can make their 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 smallest details. Some people consider a high return on equity to be a good sign of a quality business. So you might want to see this free a set of companies with a high return on equity, or that list of stocks that insiders buy.
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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