The statutory profit does not reflect the quality of income of Medistim (OB: MEDI)
Although Medistim ASA (OB:MEDI) The recent earnings release was robust, the market didn’t seem to notice. We think investors have missed some of the encouraging factors underlying the earnings numbers.
See our latest analysis for Medistim
A closer look at the benefits of Medistim
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. This ratio tells us how much of a company’s profit is not backed by free cash flow.
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 earnings suggest. 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. Indeed, some academic studies have suggested that high accrual ratios tend to lead to lower earnings or less earnings growth.
Over the twelve months to December 2021, Medistim recorded a growth ratio of -0.20. This indicates that its free cash flow has greatly exceeded its statutory profit. Namely, it produced free cash flow of kr 128 million during the period, eclipsing its reported profit of kr 90.9 million. Medistim shareholders are undoubtedly pleased with the improvement in free cash flow over the past twelve months.
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.
Our view on Medistim’s earnings performance
As mentioned above, Medistim’s accrual ratio indicates strong earnings to free cash flow conversion, which is positive for the business. For this reason, we believe that the underlying earnings potential of Medistim is as good, if not better, than the statutory profit suggests! And on top of that, its earnings per share have grown 59% annually over the past three years. The aim of this article has been to assess how much we can rely on statutory income to reflect business potential, but there is much more to consider. If you want to dive deeper into Medistim, you should also consider the risks it currently faces. During our analysis, we found that Medistim has 1 warning sign and it would be unwise to ignore it.
Today, we zoomed in on a single data point to better understand the nature of Medistim’s benefits. But there are many other ways to inform your opinion about a company. Some people consider a high return on equity to be a good sign of a quality company. Although it might take a bit of research on your behalf, you might find this free collection of companies offering a high return on equity, or this list of stocks that insiders buy to be useful.
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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.