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The subdued market reaction suggests that Applied Nutrition Plc's (LON:APN) recent earnings didn't contain any surprises. We think that investors are worried about some weaknesses underlying the earnings.
A Closer Look At Applied Nutrition's Earnings
As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.
Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".
For the year to January 2025, Applied Nutrition had an accrual ratio of 0.37. Ergo, its free cash flow is significantly weaker than its profit. As a general rule, that bodes poorly for future profitability. In fact, it had free cash flow of UK£5.5m in the last year, which was a lot less than its statutory profit of UK£15.3m. Applied Nutrition's free cash flow actually declined over the last year, but it may bounce back next year, since free cash flow is often more volatile than accounting profits.
That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.
Our Take On Applied Nutrition's Profit Performance
As we discussed above, we think Applied Nutrition's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Applied Nutrition's underlying earnings power is lower than its statutory profit. Sadly, its EPS was down over the last twelve months. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you want to do dive deeper into Applied Nutrition, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 1 warning sign for Applied Nutrition and you'll want to know about this.