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by GoPro, Inc. (NASDAQ: GPRO) The strong earnings report was rewarded with a positive move in stock prices. Our analysis revealed other factors that we believe are good for shareholders.
See our latest review for GoPro
Focus on GoPro’s earnings
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.
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. Notably, some academic evidence suggests that a high accrual ratio is a bad sign for short-term profits, in general.
For the year through June 2021, GoPro had a build ratio of -0.76. This implies that he has a very good cash conversion and that his income from last year significantly underestimates his free cash flow. Indeed, over the past twelve months, it has reported free cash flow of US $ 199 million, well above the US $ 54.5 million in profit. Given that GoPro had negative free cash flow in the previous corresponding period, the last twelve month result of $ 199 million appears to be a step in the right direction. That said, it appears that a recent tax benefit and some unusual items impacted its bottom line (and its accrual ratio).
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.
The impact of unusual items on profit
GoPro’s profit has been reduced by unusual items worth US $ 20 million over the past twelve months, which has helped it produce a high cash conversion as evidenced by its unusual items. In a scenario where these unusual items would include non-cash charges, we would expect a strong accrual ratio, which is exactly what happened in this case. While the deductions due to unusual items are disappointing at first, there is a silver lining. When we analyzed the vast majority of listed companies around the world, we found that important unusual items often do not repeat themselves. And, after all, that’s exactly what accounting terminology implies. Assuming these unusual expenses don’t happen again, then we would expect GoPro to produce a higher profit next year, all other things being equal.
An unusual tax situation
In addition to the noticeable build-up ratio, we can see that GoPro received a tax benefit of $ 9.1 million. This is of course a little unusual, given that it is more common for businesses to pay taxes than to receive tax benefits! Sure, At first glance it’s great to receive a tax benefit. And since he has already lost money, it might just indicate the realization of past tax losses. However, our data indicates that tax benefits may temporarily increase statutory profit in the year it is recognized, but profit may then decline. In the probable event that the tax advantage does not recur, we would expect its statutory profit levels to decline, at least in the absence of strong growth. So while we think it’s great to have a tax benefit, it usually involves an increased risk that statutory profit overestimates the company’s sustainable earning capacity.
Our take on GoPro’s profit performance
In summary, GoPro’s build-up ratio and its unusual elements suggest that its statutory income has been temporarily depressed, while its tax advantage is having the opposite effect. Based on these factors, we believe GoPro’s earning potential is at least as good as it looks, and maybe even better! In light of this, if you want to do more analysis on the business, it is essential to be aware of the risks involved. During our analysis, we found that GoPro has 4 warning signs and it would be unwise to ignore them.
After our review of the nature of GoPro’s earnings, we came out optimistic for the company. 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 set of companies offering a high return on equity, or that list of stocks that insiders buy to be useful.
Promoted
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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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